Following a public consultation that launched in October 2019, the EU Commission announced on 24th July 2020 that it is proposing only limited changes to the EU benchmarks regulation.
Further, it seems increasingly likely that the new “UK BMR” will be introduced at the end of this year, leaving both third country and EU index providers needing to gain a registration from the FCA, in order for usage of the benchmarks to continue beyond that regulation’s introductory transition period.
The Benchmarks Regulation governs all benchmarks used in the EU and UK, and that places a series of obligations on the administrators of those benchmarks, no matter where in the world they’re based.
Non-compliance continues to mean that those benchmarks cannot be used within the EU and UK.
These changes will allow the EU to replace LIBOR (or any other critical benchmark) with an alternative benchmark – effectively allowing contracts referencing LIBOR to continue to function beyond the previously intended LIBOR closure date of December 31st 2021. They will also allow EU users to retain access to various currency benchmarks produced by third country benchmark administrators.
However, the Commission has decided not to make changes to the regulation’s applicability to other third country index administrators (such as those producing equity and fixed income benchmarks) and therefore the deadline of January 1st 2022 for compliance with BMR stands.
Non-compliance will mean those benchmarks cannot be used within the EU and UK.
This leaves those administrators, many of which were presuming a reduction in the applicability of the regulation, with a limited timeframe to prepare their applications for EU registration[1], submit them and see them through the applications process. Failure to do so will mean the use of those benchmarks – funds and other investable products such as ETFs – must cease.
Why the urgency?
Preparing to comply with EU BMR was never going to be easy in “normal” times but in light of the current political and coronavirus-driven environment, the 18 months that administrators have to secure authorisation in the EU, the UK or both jurisdictions, is quite a tight timetable – as we outline below.
Third country administrators whose benchmarks are used in the EU have until the end of 2021 to find an EU partner (a “legal representative” or “endorser”) and prepare their policies and procedures for scrutiny by an EU regulator.
If Brexit occurs at the end of 2020 with no deal – as seems increasingly likely – those whose benchmarks are used in the UK and who either have no EU BMR registration or whose EU BMR registration was not delivered by the UK FCA, will also need to find a UK partner to deliver their obligations under the new “UK BMR” that will be implemented in this scenario.
Those in the position of having no registration under EU BMR but whose benchmarks are used in both the UK and the EU, will need to apply to both jurisdictions.
Ideally, a single partner would be able to provide both the EU and UK services needed.
This is further complicated by the fact there are only a limited number of legal representatives / endorsers (and a very limited number that have actually carried out this role to date) and it can take time to identify a potential partner and build a relationship.
The administrator and their UK / EU partner need to consider whether recognition or endorsement is the appropriate method of achieving registration within that jurisdiction.[2] If the administrator’s benchmarks are used in both jurisdictions, the administrator must consider whether they need to directly face either one, or even two, separate benchmarks regulations and regulators. In our experience, most third country administrators are planning either to have their indices endorsed in both jurisdictions or to become recognised in the jurisdiction where they have most usage, with endorsement in the other. This process can be protracted, as it is complex, involving legal, financial and strategic questions. We strongly advise third country administrators to discuss this with prospective legal representatives / endorsers immediately.
Administrators will then need to come to contractual agreement with the EU / UK partner.
Next, they will need to analyse current compliance with one or both regulatory regimes, along with the requirements of the legal representative / endorser, and remediate where necessary. Generally, this involves a significant exercise to build, document, implement and demonstrate new policies and procedures that meet the requirements. Even administrators with very good governance systems often find they need to create a significant number of additional documents.
Where recognition is the chosen route in one or both jurisdictions, the administrator will need to prepare their regulatory application(s). Where endorsement is chosen, time will need to be allocated for the endorser to build the application on behalf of the administrator.
Lastly, the application must be submitted, and the EU / UK partner work with the regulatory authority to complete the registration.
In our experience, this process takes nine months at the very least – if the administrator is extremely well prepared and the regulatory application process goes exceptionally smoothly – but on the whole a year from start to finish.
The situation is further complicated by two factors: Firstly, the impending deadline means the small number of UK / EU service providers in this area will be coming under greater pressure, potentially slowing them down. Secondly, the various national competent authorities will be receiving a greater number of applications, potentially delaying the process further.
How Moorgate Benchmarks Can Help You
Moorgate Benchmarks is a benchmark administrator authorised under the EU BMR by the FCA. We were the first independent service provider to bring a third country client to registration under the EU Benchmarks Regulation, and we are experts in implementing best practice governance systems to meet benchmark regulation; designing, optimising, managing and calculating indices for clients; and streamlining operations through leading-edge technology. We are currently working with clients across the world on applications under both UK and EU BMR. We are also assisting clients as an expert consultant where applications use other partners for recognition or endorsement.
We can take on the administration of existing benchmarks, act as legal representative for third country administrators seeking recognition within the EU, or endorse administrators’ indices for use within the EU.
At the end of 2020, Moorgate Benchmarks will become a UK-registered administrator under the UK BMR. Our German subsidiary will become an EU-registered administrator within that time frame, enabling us to continue offering recognition and endorsement services within the EU, under the EU BMR.
Uniquely, we provide a fixed-cost service for endorsing third country benchmarks that meet certain risk-based criteria, as well as a bespoke service for recognition or endorsement of all other benchmarks.
Overview – EU benchmarks regulation
In October last year the EU Commission launched a consultation, soliciting opinions on various aspects of EU 2016/1011 – the EU Benchmarks Regulation. The consultation touched on the regulation of critical benchmarks such as LIBOR; administrative matters such as the authorisation process and register of benchmarks; and the scope of the regulation.
This latter point was of most interest to the many third country (i.e. based outside the EU) index providers who had been grappling with the BMR’s requirement that they obtain either “recognition” (direct regulation by an EU regulator, in partnership with an EU-based “legal representative”) or “endorsement” (having specific benchmarks endorsed via an application made by an EU-based “endorser” on their behalf) of their benchmarks within the EU, as there was at least a possibility that the requirement might be reduced or eliminated.
Today’s announcement from the Commission details various changes around critical benchmarks and currency benchmarks. There are no proposed changes to the third country regime and no further extension to the transition period. As a result, index providers that have been sitting on their hands now face a shortened timetable to secure authorisation by the end of the transition period on December 31st 2021.
Overview – UK Benchmarks Regulation
Separate to the above, with only seven months until the end of the UK transition period before it fully leaves the EU, it seems inevitable that the UK will implement the UK benchmarks regulation from that point. This regulation copies the existing EU BMR with the additional requirement of authorisation under UK BMR for all administrators outside the UK whose benchmarks are used within the UK – again via either equivalence, recognition or endorsement. EU-based administrators can hold out hope that the EU regime will be deemed equivalent to the UK regime, but this has not been raised yet.
The UK BMR will be immediately applicable for UK administrators, who should all be authorised already. Both UK-based and non-UK administrators that were authorised via the FCA will automatically be transferred from EU authorisation to UK authorisation. However, both will need to reapply before the end of 2021 for EU authorisation if their benchmarks are used in the EU as well as the UK.
[1] Most non-EU / UK administrators will technically receive a “registration” under the EU / UK BMR, not an “authorisation”, although that term is commonly used.
[2] The pros and cons of recognition and endorsement merit a separate article but, in short, recognition involves the administrator making a direct application to the regulator, a higher up-front cost of developing documentation and demonstrating compliance yet, once authorised, the administrator can produce new benchmarks that can immediately be used within the jurisdiction. Endorsement carries a lower up-front cost, and the administrator does not have to make an application (the application is from their endorser) but any future new benchmarks require a new application to be made by the endorser.
