New EU-wide rules, which will apply from November 2017, aim to ensure greater accuracy and integrity of benchmarks in financial instruments. Known as the Benchmark Regulation, it was adopted by the European Council on 17 May. Born out of recent market manipulation scandals the Regulation is intended to restore confidence in financial benchmarks.
The Regulation has been formulated to improve the benchmark process, something that was not thought to be achievable through market abuse and criminal sanction regimes alone. The Regulation aims to improve governance and controls; avoid conflicts of interest through greater supervision; and protect consumers and investors through greater transparency.
Key points of the Regulation
- Benchmarks will be subject to requirements appropriate to their size and nature, while at the same time respecting a core set of minimum requirements in line with the internationally agreed principles of the International Organization of Securities Commissions (IOSCO).
- The Regulation introduces a legally-binding code of conduct for contributors, requiring the use of robust methodologies and sufficient and reliable data, calling for the use of actual transaction input data where possible.
- Administrators of benchmarks will have to apply for authorisation and will be subject to supervision by the competent authority of the country in which they are located.
- Specific regimes will apply to commodity, interest rate and regulated data benchmarks.
- Benchmarks provided by non-EU countries will be used by supervised entities in the EU through “recognition” or “endorsement” regimes, based on compliance with the IOSCO principles.
How will the Regulation affect the current UK regime?
The Regulation, directly applicable across the EU, supersedes the current UK regime and will bring additional benchmarks into the regulatory framework.
Since 2013 the UK has taken decisive, and extensive, action to reform benchmark regulation and is already in line with the overarching objective of the Regulation. Following the Wheatley Review, the administration of and submission to LIBOR became a regulated activity and in April 2015 seven other major benchmarks became regulated. The current regulation of those benchmarks focuses on ensuring appropriate governance arrangements and that there are effective controls to monitor and manage conflicts of interest. The FCA’s objective is to restore the public’s confidence in benchmarks, to that end regulation focuses on transparent methodologies and clear accountability.
Notwithstanding the UK’s existing approach, due to the international nature of benchmarks the Regulation aims to provide a common framework for regulation at a national level across the EU. To that end, the European Securities and Markets Authority (ESMA) will coordinate the supervision of benchmark administrators by national regulators.
Sanctions for Infringement
Member States will adopt national rules on penalties and sanctions for contravention of the Regulation. The Regulation does provide that administrative sanctions should be effective, proportionate and dissuasive, and sets out the minimum powers that must be available to national regulators, including:
- a temporary ban prohibiting individuals from exercising management functions in administrators or supervised contributors;
- financial penalties for both individuals and companies (up to at least EUR 500,000 for individuals and for companies, in certain cases, at least 10% of its turnover);
- disgorgement of profits gained or losses avoided because of the infringement; and
- public warnings and cease and desist orders.
Nothing in the Regulation prejudices national provisions in relation to criminal sanctions and nor does it limit the ability of a Member State to provide for higher levels of administrative sanctions. The Regulation also ensures that national regulators are provided with a wide range of supervisory and investigatory powers.
Firms involved in benchmark activities are already being encouraged to formulate their strategy to ensure compliance with the Regulation. However, the details of many of the requirements are absent and pending ESMA’s regulatory and implementing technical standards the extent to which efficient action can be taken is limited. Until such standards are published, likely to be 2017, it is difficult to assess the extent to which the already recently reformed UK regime will be amended to ensure compliance.