The European Benchmarks Regulation (BMR) introduces a regime for benchmark administrators that aims to ensure the accuracy and integrity of benchmarks. The legislation was adopted in 2016 and has been in force since 2018, subject to certain transitional provisions applicable to both European and third-country benchmark administrators. In particular, European benchmark administrators had to apply for authorisation or registration by 01 January 2020.
Scope and definition of “benchmark”
The BMR is broad in scope and applies to almost all financial, interest rate, regulated data and commodity benchmarks, subject to very limited exemptions. The BMR defines a “benchmark” as any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or “an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees”. The meaning of “index” under the legislation is expansive and includes any figure that:
- is published or made available to the public;
- is regularly determined by the application of a formula or any other method of calculation, or by an assessment; and
- on the basis of the value of one or more underlying assets or prices.
The BMR includes a complicated matrix for the classification of benchmarks depending on their methodology, risk profiles and the underlying market that they intend to measure. In terms of types of benchmarks, based on the underlying and/or methodology, the BMR distinguishes commodity benchmarks, interest rate benchmarks and regulated data benchmarks. In relation to benchmarks’ risk profile and applying the principle of proportionality, the BMR categories benchmarks as non-significant, significant and critical. The application of select BMR provisions is adjusted in accordance with a benchmark’s classification.
Under the BMR, European benchmark administrators are required to apply for authorisation or registration and are subject to supervision by the national competent authorities. Upon application for authorisation or registration, the applicant must demonstrate that their benchmark-setting process and the governance of their benchmarks complies with the applicable requirements set out in the BMR.
The BMR governance and control requirements for benchmark administrators include expansive provisions on conflicts of interest, the oversight function, control frameworks, accountability and record keeping requirements, complaints-handling mechanisms, outsourcing, input data, methodology and reporting of infringements.
The BMR defines contributors as “natural or legal persons contributing input data”. For benchmarks based on the provision of input data by contributors, the BMR requires benchmark administrators to develop a code of conduct, setting out the responsibilities of contributors in relation to input data. This includes a description of the relevant input data, provisions regarding identification of persons that may provide input data, policies to ensure that a contributor provides all relevant input data, and systems and controls that a contributor is required to establish. While codes of conduct are not legally binding, contributors are expected to adhere to them on a continuous basis.
“Use of a benchmark” is a defined term under the BMR. Examples of the use of benchmark include the issuance of a financial instrument referencing an index or a combination thereof, the determination of an amount payable under a financial instrument or a financial contract by referencing an index or a combination thereof, or being a party to a financial contract or providing a borrowing rate. Users of benchmarks are not subject to any standalone regulatory requirements under the BMR. However, they must ensure that the benchmarks they use are compliant with the provisions of the legislation.
The BMR introduces a separate regime governing the use of benchmarks provided by third-country administrators. There are three separate mechanisms that allow third-country benchmark administrators to obtain a licence to provide their benchmarks in the European Union: (1) adoption of an equivalence decision by the European Commission in respect of a third-country jurisdiction; (2) recognition of third-country administrator by a national competent authority of a Member State of reference; and (3) endorsement of a third-country benchmark by an EU administrator or a supervised entity. Third-country benchmark administrators have until 31 December 2021 to apply for any of the above listed types of licence.
Review and potential amendments
Building on feedback received to a public consultation, in Q3 2020 the European Commission is expected to propose targeted amendments to the BMR. These are likely to address the issues regarding the scope of the legislation and may involve an easing of requirements for non-significant benchmarks, as well as provisions governing authorisation and registration procedures, critical benchmarks and the regime for third-country benchmark administrators seeking to provide their products in the EU.