benchmarks

European Commission Implementing Regulation Establishing a List of Critical Benchmarks Used in Financial Markets under Benchmarks Regulation in OJ

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On August 12, 2016, the European Commission Implementing Regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets pursuant to the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (2016/1011/EU) (Benchmarks Regulation), was published in the Official Journal of the EU (OJ).

The Regulation highlights that benchmarks play an important role in the determination of the price of many financial instruments and financial contracts and of the measurement of performance for many investment funds. In order to fulfill their economic role, benchmarks need to be representative of the underlying market or economic reality they reflect. Should a benchmark no longer be representative of an underlying market, such as interbank offered rates, there is a risk of negative effects on, inter alia, market integrity, the financing of households (loans and mortgages) and businesses in the Union.

The Implementing Regulation, which specifies the Euro Interbank Offered Rate (EURIBOR) as a critical benchmark, enters into force on the day following its publication in the OJ (that is, August 13, 2016). It will apply from January 1, 2018.

European Commission Adopts MiFIR Delegated Regulation on RTS on Access to Benchmarks

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On June 2, 2016, the European Commission adopted a Delegated Regulation supplementing the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) with regard to regulatory technical standards (RTS) on access in respect of benchmarks (C(2016) 3203 final).

MiFIR provides for the non-discriminatory access for central counterparties (CCPs) and trading venues to licences of, and information relating to, benchmarks that are used to determine the value of some financial instruments for trading and clearing purposes.

The Delegated Regulation lays down the list of information to be provided to a trading venue or CCP, the conditions under which access must be granted as well as specifications on non-discriminatory treatment. It also sets out the standards for determining how a benchmark can be considered to be new, and hence benefit from transitory arrangements.

Following adoption of the Delegated Regulation by the Commission, it will be considered by the Council of the EU and the European Parliament. If neither of them objects, the Delegated Regulation states that it will enter into force 20 days after its publication in the Official Journal of the EU (OJ) and will apply from the date referred to in the fourth paragraph of Article 55 of MiFIR.

Benchmarks: Agreement Reached on ECON Committee

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On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted its report on benchmarks. Key issues include: The Economic and Monetary Affairs Committee backed a draft EU law to make the benchmarks more trustworthy. The text aims to clean up the benchmark-setting process by curbing conflicts of interest like those that led to the London Interbank Offered Rate (LIBOR) rigging scandals of recent years. The setting of critical benchmarks that affect more than one country would be overseen by a “college” of supervisors, including the European Securities and Markets Authority (ESMA) and other competent authorities.

Curbing critical conflicts of interest

The draft law aims to curb conflicts of interest in setting “critical” benchmarks, such as LIBOR and EURIBOR, which, by influencing financial instruments and contracts with an average value of at least €500 billion, could affect the stability of financial markets across Europe.

The final decision on whether a benchmark is “critical” would be up to ESMA and national authorities, but a national authority could also deem a benchmark administered within its territory to be critical if it has a “significant” impact on the national market.

Critical benchmark administrators would have to have a clear organizational structure to prevent conflicts of interest, and be subject to effective control procedures.

Critical benchmark-setting data would have to be verifiable and come from reliable contributors who are bound by a code of conduct for each benchmark. Contributors, such as banks contributing data needed to determine a critical benchmark, would have to notify the benchmark administrator and the relevant authority if they wished to cease doing so, but would nonetheless have to continue doing so until a replacement were found.

Transparency requirements

All benchmark administrators would have to be registered with the ESMA and would have to publish a “benchmark statement” defining precisely what their benchmark measures and to what extent it is reliable. They would also have to publish or disclose existing and potential conflicts of interest and meet accountability, record keeping, audit and review requirements.

The text will be put to a vote by Parliament as a whole to consolidate Parliament’s position before its three-way negotiations with EU member states and the European Commission.

European Commission Proposes Regulation on Benchmarks

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On September 18, the European Commission published a proposed Regulation on indices used as benchmarks in financial instruments and financial contracts, together with a number of related documents, including an impact assessment and a set of frequently asked questions.

The aim of the proposed Regulation is to ensure the integrity of and restore confidence in benchmarks.  In broad terms, the Commission intends to achieve this by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately and reflect the actual market or economic reality they are intended to measure.

The proposed Regulation will now pass to the European Parliament and the Council of the EU for consideration under the ordinary legislative procedure.  Proposed Regulation.