December 2023
Changes have been made and are being proposed to the Benchmarks Regulation in both the EU and UK. Benchmark administrators may want to review their business and compliance strategy in light of these changes.
The Benchmarks Regulation came into force in the EU (including at the time the UK) between 2016 and 2018. The Regulation was in reaction to issues such as the manipulation of LIBOR, FX and commodities benchmarks. Its aim was to improve transparency and mitigate conflicts of interest leading to more robust and reliable benchmarks. The existing Regulation builds upon (and goes beyond) the IOSCO 2013 Principles for Financial Benchmarks. It has a much wider scope than other jurisdictions that tend to regulate a more limited range of critical benchmarks or rely on self-regulation.
As part of the process of the UK withdrawing from the EU, the UK on-shored the Benchmarks Regulation into UK legislation.
Concern has been building that many third country providers of benchmarks have not applied for authorisation in the EU even after two extensions of the transitional period. The Regulation had originally been drafted on the assumption that non-EU jurisdictions would develop comparably comprehensive rules for financial benchmarks. This would have allowed the Commission to recognise those regulatory systems as equivalent or would have enabled third country benchmark administrators to seek access to the EU market via the routes of recognition or endorsement with no or lower additional compliance efforts. However, this has not been the case. A European Commission report in July 2023 found that only 5 percent of the non-EU benchmark administrators currently supplying benchmarks to the EU market have obtained authorisation. The Commission raised the concern that, once the third country rules entered into force, the number of benchmarks available for EU supervised entities would drop considerably and could pose a risk to financial stability. Therefore, the Commission has now further extended the transitional regime to 31 December 2025.
Proposed changes in the EU
Given the above issues, the European Commission has proposed revisions to the EU Benchmark Regulation to reduce the administrative and regulatory burden imposed both on EU benchmark users and on EU benchmark administrators.
The proposal:
- Reduces the scope of the third-country rules to those benchmarks that are significant for the EU markets, therefore reducing the risk that users of benchmarks in the EU are not able to reference certain benchmarks.
- For EU benchmarks, limits the scope of the Benchmarks Regulation to those that are significant, therefore ensuring there is a level playing field between third-country and EU benchmarks.
Significant benchmarks are classified as those benchmarks that are referenced by financial instruments and financial contracts with a total value above EUR 50 billion. As this is a strictly quantitative criterion, benchmark administrators will be required to monitor benchmark usage and self-report when they reach the threshold.
National supervisors (for EU benchmarks) and ESMA (for non-EU benchmarks) will be able to designate additional benchmarks that do not reach the quantitative threshold as significant but whose discontinuation could have a significant adverse impact on financial stability, market integrity or consumers.
Changes in the UK
When the Benchmarks Regulation was on-shored into the UK, the third country benchmarks transitional period expired at the end of 2025. HM Treasury (HMT) have recently announced that the transitional period will be extended to 31 December 2030. This is to allow the continued availability of the number and variety of important benchmarks in the UK, allowing 'UK companies to plan with confidence that they will not lose access to benchmarks that are critical to their operations'.
Alongside this, the UK government is reviewing and repealing EU on-shored legislation — the Smarter Regulatory Framework programme. As part of this, HMT has announced it will consider where reforms are needed to the third country benchmarks regime. Indications are that the Benchmarks Regulation review will be in one of the later phases of the programme.
Implications for Benchmark Administrators and Users
The European Commission proposed changes to the Benchmark Regulation could be amended as they go through Parliament and Council processes and there is yet to be any detail available on possible UK changes. However, the direction of travel is clear, third country benchmark administrators are unlikely to have to comply with the full scope of the Benchmarks Regulation as currently in force in the EU and UK, and potentially may not have to apply for authorisation of some of their benchmarks.
This initially suggests a reduction in the compliance burden to allow a wide range of benchmarks to be used in the EU and UK.
However, many users of benchmarks may have gained additional comfort from the credibility of using a benchmark that was regulated and provided by an authorised benchmark administrator. Users may market their financial products referencing the regulated benchmark on the high level of standards that the benchmark provides.
Benchmark administrators that produce 'significant' benchmarks may find it more complicated to administrate two different sets of requirements for significant and non-significant benchmarks, especially as benchmarks could shift from one set of requirements to another depending upon their usage or regulators' opinion.
Benchmark administrators will need to reflect on their business models in light of these proposed changes. Differences in approach and timing between the UK and EU BMR regime may introduce unintended friction for both administrators and users. Benchmark administrators are likely to need to consider the requirements of their users in navigating the most suitable path through these compliance changes.
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