Benchmarks: EU and UK regulatory outlook

Introduction

The provision of benchmarks is a regulated activity in the European Union (EU) and in the United Kingdom (UK). The legal framework governing the provision and use of benchmarks is set out in the Benchmarks Regulation (BMR) that introduces an obligation for European and UK benchmark administrators to be authorized or registered if they wish to provide their benchmarks for use by supervised entities in the EU, and for third-country benchmark administrators to have a license to provide their benchmarks in the EU.¹ BMR has been applicable to UK and EU administrators since January 1, 2020, but allows third-country benchmark administrators to benefit from a longer transitional period.

While BMR will remain part of the retained EU law applicable in the UK, following the expiry of the Brexit implementation period on December 31, 2020, the UK and the EU will have two separate – yet similar, at least initially – legal frameworks governing the provision of benchmarks. 

This note highlights some of the divergences that are starting to arise between the EU and UK benchmark regimes. It also provides an overview of the new upcoming EU and UK requirements applicable to benchmark administrators, as well as a summary of the key ongoing legislative and regulatory developments, together with views on application timelines.

Who is this relevant to?

This note is relevant to benchmark administrators authorized or registered in the UK or one of the Member States, persons interested in becoming an authorized or registered benchmark administrator on either side of the English channel and third-country benchmark administrators.

Senior Managers Regime

The Senior Managers Regime (SMR) will apply to solo FCA-authorized benchmark administrators that do not provide any other regulated activities from December 7, 2020. The SMR will require such benchmark administrators to allocate certain prescribed responsibilities to senior managers, who will need to be approved by the FCA and maintain a statement of responsibilities – albeit without the need to comply with the certification and responsibilities maps requirements. The regime also imposes conduct rules on a wide range of other staff who will need to be trained by December 7, 2021. 

NRF recommended action: 

• UK solo-regulated benchmark administrators should be preparing statements of responsibilities for their senior managers and training them on the new regime as a matter of priority.

ESG disclosures

With the growing cross-sectoral focus on environmental, social and governance (ESG) issues, the relevant requirements for benchmark administrators were adopted into law in 2019 by means of targeted amendments to BMR.² The amendments introduced a requirement for benchmark administrators to disclose in their methodologies and benchmark statements whether the benchmark(s) they provide reflect any of the ESG factors as set out in the legislation. While the requirements were intended to become applicable as of April 30, 2020, due to a delay in adoption of essential secondary legislation, they are subject to a temporary forbearance regime.³ With the formal adoption of the said secondary legislation being expected over the coming weeks, the ESG disclosure requirements are likely to become applicable before the end of 2020 or in early 2021. In addition, by December 31, 2021 administrators of benchmarks – other than interest rate or FX – will have to include in their benchmark statement an explanation of how their methodology aligns with the target of carbon emission reductions or attains the objectives of the Paris Agreement. 

NRF recommended action: 

• Benchmark administrators should start reviewing their existing documentation (methodologies and benchmark statements) against the ESG factors for the type of benchmark they provide. 

Climate Transition Benchmarks and EU Paris-aligned Benchmarks

The same set of amendments to BMR that introduced the ESG disclosure obligations also introduced two new categories of benchmarks: EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. With the increased focus by the financial services industry on access to low-carbon benchmarks for the purpose of investment strategies, the underlying objective underpinning the creation of the two new benchmarks was to provide a harmonized framework for the creation of low-carbon benchmarks in the EU and to set out a minimum requirements for their methodologies. In the UK, The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020 amended the retained EU law and introduced UK Climate Transition Benchmarks and UK Paris-aligned Benchmarks. While the relevant provisions on low-carbon benchmarks were intended to apply to administrators of such benchmarks as of April 30, 2020, the adoption of secondary legislation setting out minimum standards for EU Climate Transition and Paris-aligned Benchmarks is still pending. Finally, by January 1, 2022, the EU and UK administrators providing significant benchmarks “shall endeavour” to provide one or more Climate Transition Benchmarks. 

NRF recommended action: 

• Benchmark administrators providing or intending to provide EU and/or UK Climate Transition Benchmarks and/or Paris-aligned Benchmarks to start reviewing and/or developing documentation against the set of minimum criteria for such benchmarks that have been proposed in the secondary legislation.

New regulatory technical standards

On September 29, 2020, the European Securities and Markets Authority (ESMA) published its final report including a set of draft regulatory technical standards (RTS) under BMR. The draft RTS seek to enhance the robustness of the governance arrangements of administrators, ensure that the potential manipulation of benchmarks is minimized and set out common criteria for Member States for the purpose of the assessment of the mandatory administration of critical benchmarks and the compliance statement for non-significant benchmarks. In order to become applicable, the proposed RTS will need be formally approved by the European Commission, and subsequently by the European Parliament and by the Council.  

NRF recommended action:

•  Benchmark administrators should familiarize themselves with the content of the draft RTS and to start mapping their documentation for any prospective changes that might be required.

Transitional period for third-country benchmarks

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 license to provide their benchmarks in the UK and in the EU: equivalence, recognition or endorsement. However, there is currently a transition period, which is due to remain until December 31, 2021 in the EU, and until December 31, 2022 in the UK. That said, the UK Government has proposed in the recently introduced Financial Services Bill to extend this transitional period until the end of December 31, 2025 and European legislators are also considering, in the context of the BMR review, an extension of the third-country transitional provisions. Separately, as of the end of 2021, there will be significant changes to the process of application for third-country benchmark administrators seeking recognition in the EU, with ESMA assuming the role previously held by competent authorities. 

NRF recommended action:

• Third-country benchmark administrators that consider obtaining a license to provide their benchmarks in the UK and/or in the EU should monitor closely the relevant legislative developments concerning timelines for the expiry of the transitional period in both locations and familiarize themselves with the application process and its requirements.

Amendments to EU and UK critical benchmarks regime

In order to facilitate the expected phasing out of LIBOR by the end of 2021 – and prospectively other critical benchmarks – the European Commission proposed in July 2020 a set of targeted amendments to BMR. Once formally adopted, the said amendments will create a framework allowing for the introduction of a statutory replacement rate for a critical benchmark that is due to be phased out. In the UK, similarly-intended amendments were put forward in the recently introduced Financial Services Bill which will clarify the FCA’s powers to ensure the orderly wind-down of LIBOR.

NRF recommended action:

• Users of critical benchmarks – and LIBOR in particular – should start reviewing the relevant contracts referencing the benchmark and preparing for transition.

How we can help

Our financial services and regulation team is experienced in supporting European, UK and third-country benchmark administrators in becoming authorized, and in providing ongoing practical legal and compliance support. In order to help you and your team better understand how the relevant requirements and legislative developments might affect your benchmark administration business, please contact us to enquire about a complimentary training session for your legal, compliance and/or business teams. The session could cover EU and UK benchmark legislation, upcoming regulatory changes and the relevant timeframes, as well as broader legislative developments, and we would be happy to tailor the session to best meet your organization’s needs. We would also aim to answer any immediate questions that you and your team may have.