THE UK BENCHMARKS REGULATION IN BRIEF
From two years after Brexit day, many indices used by UK market participants must be authorised by the FCA (Financial Conduct Authority) in order for that usage to continue. A number of uses are covered:
- Index tracking UCITS and AIFs
- Other funds constrained by indices (including many active funds)
- Financial instruments whose payoffs or fees are derived entirely or in part using indices
- Index derivatives, CFDs, swaps and other financial instruments – whether actually traded inside or outside the EU
- Financial contracts such as mortgages & loans
For existing arrangements to continue, third country index providers whose indices are used in any of the ways noted above will have to either seek recognition as a third country index provider, or endorsement of their indices. Without one or the other, any existing usage has to cease by the second anniversary of Brexit day, i.e. two years after Brexit. New indices issued by index providers who started providing indices after June 2016 can only be used when the index provider is authorised.
RECOGNITION OF THIRD COUNTRY INDEX PROVIDERS
Under this option, the index provider applies for “recognition” via the FCA. As part of its application, it is required to demonstrate it has a contractual agreement with a UK-based “legal representative” that takes on the legal risk of providing benchmarks within the UK, and that together with the index provider, “oversees” the provider’s indices. Moorgate Benchmarks offers this service.
- The authorisation covers existing and future indices, presuming they are governed in accordance with the regulation.
- The third country index provider has a direct relationship with the FCA.
ENDORSEMENT OF INDICES FROM THIRD COUNTRY PROVIDERS
Under this option, Moorgate Benchmarks applies to the FCA to endorse an index provider’s indices as suitable for use within the UK. Moorgate takes on an oversight role together with the index provider.
- This approach transfers the majority of UK-based legal risk from the third country provider to Moorgate Benchmarks.
No direct relationship is required between the third country index provider and the FCA.
- Under endorsement, only specified indices are deemed compliant and therefore available for use within the UK. Any new indices created after the initial authorisation have to be added to the UK benchmarks register through an additional application process.
MOORGATE BENCHMARKS’ EXPERIENCE
We are a regulated benchmark administrator under the EU Benchmarks Regulation and will be a regulated benchmark administrator under the UK Benchmarks Regulation when it comes into effect. We have successfully worked with EU and non-EU benchmark administrators to design and document their processes and procedures, and to build and submit their applications under the EU Benchmarks Regulation.
We are the legal representative to the first successful American index provider to gain authorisation (under the recognition process) as a third country (non-EU) benchmark administrator, and are working with other administrators from around the globe to provide recognition or endorsement of their index businesses.