On 11 October 2019, the European Commission (Commission) launched consultation on a review of the EU Benchmarks Regulation (BMR). The Commission is mandated by Article 54 BMR to conduct a review of certain provisions of the BMR and to submit a report to the European Parliament and to the Council by 1 January 2020. In addition, by 1 April 2020 the Commission must report on the implementation of the BMR’s third-country benchmark regime. The deadline to submit responses to the ongoing consultation is 6 December 2019.
The main elements of the consultation include:
The Commission notes extension of the deadline for critical benchmark administrators to obtain authorisation (until 31 December 2021) and the transfer of supervision powers in respect of such benchmarks to the European Securities and Markets Authority (ESMA). In this context, the Commission notes the ongoing IBOR reform and seeks stakeholder views on, among other, measures providing competent authorities with broader powers to require the administrators of critical benchmarks to change the methodology and extent to which benchmark cessation plans should be approved by national competent authorities. Also, the Commission seeks views on whether supervised entities should draw up contingency plans to cover instances where a critical benchmark ceases to be representative of its underlying market and whether the system of supervision by colleges is appropriate for the supervision of critical benchmarks.
Authorisation and registration procedure
The Commission focuses on issues relating to suspension and withdrawal of a benchmark’s administrator’s authorisation or registration. To this end, it seeks stakeholder views on whether it is unclear if a competent authority has the powers to withdraw or suspend the authorisation or registration of an administrator in respect of one or more benchmarks only, and whether the current powers of competent authorities to allow the continued provision and use in existing contracts for a benchmark for which the authorisation has been suspended are sufficient. Also, the Commission questions stakeholders whether the power of competent authorities to permit continued use of a benchmark when cessation of that benchmark would result in contract frustration, are appropriate.
Scope of the BMR
The Commission notes the broad scope of the BMR and asks for stakeholder views whether the regulatory framework applying to non-significant benchmarks is adequately calibrated, and if not, what adjustments should be applied. Also, the Commission seeks views on whether the use of quantitative thresholds for the establishment of the categories of benchmarks (non-significant, significant, critical) is appropriate, and if not, what alternative methodologies should be considered. Finally, the Commission seeks stakeholder input on whether an alternative approach for certain types of benchmarks that are less prone to manipulation would be appropriate, and if so, to which types.
ESMA register of administrators and benchmarks
The Commission seeks stakeholder views as to what extent are they satisfied with the overall functioning of the ESMA register of administrators and benchmarks, and asks for suggestions in respect of any potential improvements, including whether in respect of administrators authorised or registered in the EU, the register should list benchmarks instead of/in addition to administrators.
The Commission is interested to hear from stakeholders how useful they find the benchmark statement, which the administrators need to publish in accordance with Article 27(1) BMR. The Commission notes different practices among the administrators, which make it difficult to compare benchmark statements. Also, the Commission notes recent amendments to the BMR that further specified the objectives of the benchmark statement. In particular, this includes the amended Article 27(2a) BMR that, once applicable, will require the disclosure of Environmental, Social and Governance (ESG) information for all benchmarks in the benchmark statement.
Supervision of climate-related benchmarks
The Commission takes note of the February 2019 political agreement reached by the co-legislators in respect of “Climate-related Benchmarks”. Among other, the legislation mandates the ESG disclosures for all investment benchmarks (excluding interest rates and currency). This requirement is expected to become applicable in mid-April 2020. In respect of the climate-related benchmarks, the Commission seeks stakeholder views whether competent authorities should have explicit powers to verify – (1) whether the chosen climate-related benchmark complies with the BMR and (2) whether the investment strategy referencing this index aligns with the chosen benchmark. Also, the Commission asks for industry input whether competent authorities should have explicit powers to prevent supervised entities from referencing a climate-related benchmark if such benchmark does not respect the rules applicable to climate-related benchmarks or if the investment strategy is not aligned with the reference benchmark.
In respect of commodity benchmarks, the Commission notes the applicable Annex II BMR regime and limited exemptions from thereof, and seeks stakeholder views whether the conditions under which a commodity benchmark is subject to the requirements in Title II BMR are appropriate. Also, the Commission seeks industry input whether the de minimis threshold for commodity benchmarks is appropriately set.
In respect of the set up and the functioning of the third-country regime – including equivalence, recognition and endorsement procedures – the Commission identifies certain shortcomings of these three procedures and asks for stakeholders’ views on how to improve them, albeit the consultation document does not include any proposed solutions. Regarding third-country benchmarks generally, the Commission considers, among other, whether the BMR should cover the use of third-country benchmarks in non-deliverable FX forward contracts that are entered into in order to reduce risks directly relating to the commercial activity or treasury financing activity of non-financial counterparties.