Regulatory updates for Benchmark Administrators

December 2024

As the move to passive investing is maintained, regulators are understandably keeping their focus on the robustness and integrity of financial benchmarks. This article outlines recent regulatory developments for benchmark administrators (BMAs).

The FCA has published its third supervisory strategy letter to benchmark administrators. Overall, the focus areas have not changed significantly from the previous letter issued in 2022. However, the latest letter indicates increased proactivity in supervision from the FCA with a number of multi-firm reviews planned. The FCA also specifies that the UK Benchmarks regulation (BMR) will be reviewed as part of the process of replacing assimilated EU law with regulators’ rules – however no time frame is given.

The FCA supervisory priorities are:

FCA expectations

• Management bodies are effectively overseeing strategic decision-making, risk management and regulatory compliance and providing robust challenge to the business. This is in addition to having a permanent and effective oversight function as referred to in Article 5 of the UK BMR.
• All BMAs have effective enterprise risk management frameworks.
• BMAs are able to share with the FCA their own assessment of the effectiveness of their overall governance along with any plans they have to address any weaknesses.

FCA action

• Multi-firm review in late 2025 to assess how UK regulated BMAs are governed by their SMFs and to what extent they can oversee the full range of risks to which the BMA is exposed.

FCA expectations

• Robust and regularly reviewed due-diligence processes are in operation for selecting data providers. Once selected, there are adequate processes and MI to monitor third-party data providers on an ongoing basis, including reviewing any operational changes to ensure relationships stay within risk appetites.
• Oversight and controls should be especially robust when using innovative and nascent non-price data inputs to produce benchmarks, such as ESG or AI-generated data. These data sources are typically unregulated and often subjective, relying heavily on modelling and estimates.
• Clear policies and procedures for data controls processes are in place, with detailed mapping of roles and responsibilities, strong quality assurance processes and controls.

FCA action

• Beginning in early 2025, a multi-firm review that will evaluate the due diligence performed on data providers, seeking evidence of how control frameworks adequately mitigate the additional risks associated with unregulated or innovative data.

FCA expectations

• Processes and controls to calculate benchmarks take into consideration the design of the benchmark, including its complexity, and perform the rebalancing when due, with appropriate governance and oversight.
• Appropriate governance and oversight for the launch of more complex and custom benchmarks is robustly and objectively undertaken, including sign-off at an appropriately senior level.
• Prompt identification, investigation, and escalation of errors of calculation or rebalancing, with root cause analysis to address any gaps and prevent reoccurrences is embedded with firms. MI is used to continuously improve the rebalancing processes and the overall effectiveness of the control framework.

FCA action

• In H2 2025, building on the planned multi-firm review of data input controls, another multi-firm review to evaluate the adequacy of the end to-end benchmark controls. The FCA will be seeking evidence that BMAs have adapted their controls for the launch, calculation, and rebalancing of custom or complex benchmarks.

FCA expectations

• BMAs regularly revisit their disclosures to ensure they remain fit-for-purpose, especially considering the added complexity of some multi-asset benchmarks, to ensure they comply with all rules regarding low carbon benchmarks and sustainability-related disclosures.
• To comply with the Anti-Greenwashing Rule, BMAs take steps to ensure they do not make any misleading claims or provide false impressions through the naming of benchmarks. This is particularly important given that many benchmark names are incorporated into fund names, which fall under the SDR naming and marketing rules.

FCA expectations

• BMAs minimise the risk of major disruptions and continue to improve overall operational resilience by proactively identifying and addressing any weaknesses in current arrangements.

EU Benchmarks Regulation Review

The Council and Parliament reached provisional agreement in December 2024 on the review of the EU Benchmark Regulation. A number of BMAs (including third-country benchmark providers) will welcome this agreement as, in an effort to reduce the regulatory burden, the Council and Parliament have agreed with the Commission’s original proposal, that non-significant benchmarks should no longer be within scope of the regulation.

Non Significant Benchmarks

BMAs (of non-significant benchmarks) will be able to request the voluntary application of the rules (opt-in) under certain conditions. This may be useful for BMAs who don’t want the complexity of administrating 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. 

However, the agreement intends for the development of further qualitative criteria in addition to the existing usage criteria for significant benchmarks, for example, when the benchmark has no, or very few, appropriate market-led substitutes. This may lead to an additional level of subjectivity on the non-significant / significant boundary for the industry to work through.

Third Countries

With the aim of rationalising the supervision of third-country benchmarks, ESMA will be granted supervisory powers over entities endorsing third-country benchmarks in addition to the existing powers in relation to recognition. This should simplify the approach for firms and provide greater consistency across the EU market.

BMAs will have a year to prepare as the revised regulation will apply from 1 January 2026.

Also in December 2024, ESMA published a consultation on guidelines for internal controls for Benchmark Admins (and Credit Rating Agencies (CRAs) & Data Reporting Service Providers). This consultation builds upon and replaces the Guidelines on Internal Control for CRAs (from Sept 2020) and set out ESMA’s views for all entities it directly supervises (except third-country central counterparties).  It shows ESMA’s updated expectations related to the growing use of technology, for example, expectations around governance and risk management frameworks around the use of artificial intelligence. It also demonstrates ESMA expectations around the management of third-party providers. The guidelines set out ESMAs expectations around the framework for internal controls and its expectations for internal control functions – compliance, risk management, information security, internal audit and oversight function for BMAs. The consultation closes on 18 March 2025.

BMAs are advised to keep track of the regulatory environment over the next year as changes get finalised and supervisory reviews are undertaken.

The original BMR regulation set out to ensure good conduct in the development and calculation of benchmarks used within the European Union. The latest current supervisory guidance re-enforces the need for strong business governance along with a robust framework for managing operational risks and operational resilience.

This includes clear management of risks as a result of dependence on third parties (including input data), managing all input data risks (not just pricing feeds) and the risks related to running more complex custom and bespoke indices for clients.

Third-country administrators providing benchmarks into the European Union are already assessing the best third-country mechanism for continuing to sell their products after December 2025. For those providing non-significant benchmarks the modified EU BMR requirements may ease some of the burden. However, each firm will need to assess the positive and negatives depending on the products they sell, their reputation and brand and their own customers’ future requirements.

KPMG can support in assessing BMA’s readiness against the supervisory review areas during 2025, including benchmarking against peer practices. It is anticipated that firms will need to be able to demonstrate their governance, policies and controls in these areas once the FCA seeks further engagement and clarification.

For third-country BMAs, KPMG can assist in selecting the most suitable entry mechanism into the EU and UK BMR regimes, including assisting the business to be suitably prepared for the BMR obligations and supervisory expectations.