On 18 March 2020 the European Commission published a roadmap for the review of Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (“European Benchmark Regulation” or BMR). The roadmap – formal title being “inception impact assessment” – sets out the Commission’s plan for the BMR review. To this end, the Commission outlines the main problems that the BMR review intends to address and this includes two “urgent issues”:

1. Transition from panel-based critical interest rate benchmarks to risk-free rates published by central banks

In the Commission’s view the BMR leaves the regulators ill-equipped to address the transition of critical benchmarks from panel bank rates to risk-free rates published by central banks. To this end, the Commission notes that in the most likely scenario “certain IBORs will cease to be published before all legacy contracts are renegotiated to refer to a new replacement rate, especially in view of the number of non-standardised, purely bilateral contracts”. In an alternative scenario, an IBOR rate would cease to be provided before an alternative (fall-back) rate becomes available or before the transition has been agreed. To this end and in order to address various IBOR phase-out scenarios, the Commission notes that “regulators need more extensive and finely graduated powers to monitor and accompany the industry-led IBOR transition process, and to intervene in it if there should be a market failure.” Under the current BMR regime, the Commission notes that “there is a significant risk of the IBOR transition process resulting in the cessation of a critical benchmark without a replacement rate in place or without a solution for legacy contacts that continue to reference the old IBOR rate.” The objective of the review is therefore to “equip competent authorities with supervisory powers to ensure the orderly cessation of a critical benchmark, including the power to mandate the continued provision of a critical benchmark using a different methodology or the provision replacement rate”.

2. Ensuring a level playing field / international perspectives

The Commission admits that its assumption that underpinned the equivalence regime for third-country benchmarks, i.e. that other countries will follow suit and adopt broad legislation and regulation for benchmarks in their jurisdictions, has proven wrong. The Commission consequently notes that the majority of third-country jurisdictions opted for a more targeted, designation-based approach, whereby covering only major interest rate benchmarks and systematically important benchmarks. As such, the equivalence approach is only available to a limited subset of third-country benchmarks (note that to date, the Commission adopted only two such limited equivalence decisions – in respect of Australia and Singapore). The Commission further notes in its analysis that the two alternative routes for third-country benchmark administrators to obtain a license for provision of their benchmarks in the EU – recognition and endorsement – have proven equally inefficient. The result being that EU users may risk losing access to a number of third-country benchmarks on which they depend. The Commission notes that  “the third country regime provided by the BMR has had the unexpected effect of creating a risk of EU investors and businesses losing access to a number of non-EU benchmarks on which they depend e.g., to hedge exposure to interest rate or FX risk in their daily business.” The objective of the BMR review is therefore to “ensure the continued availability to EU users of third country benchmarks for which no suitable alternative exists in the Union”.

The roadmap is open for feedback until 15 April 2020. The Commission plans to publish a legislative proposal amending BMR in late Q2 / early Q3 2020.