The European Parliament has voted in favour of amendments, proposed by its Committee on Economic and Monetary Affairs (ECON), to the Commission proposal for a Regulation on indices used as benchmarks in financial instruments and financial contracts.
The Regulation was proposed by the European Commission in September 2013 in response to a number of high profile cases of manipulation of interest rate benchmarks such as LIBOR and EURIBOR. The aim of the Regulation is to ensure the accuracy, robustness and integrity of benchmarks and the benchmark setting process.
While it was the manipulation of interest rate benchmarks that gave the impetus for the introduction of regulation in this area, the Regulation applies to a much broader range of benchmarks used in financial instruments, including benchmarks used by investment funds.
Under the Regulation, benchmarks that are not determined by the application of a formula to “regulated data” (data contributed entirely from various approved trading venues or net asset values of UCITS funds) are subject to more stringent requirements than the benchmarks based on regulated data.
Benchmarks that are not based on “regulated data” and are also used in financial instruments and financial contracts having an average value of at least €500 billion, or are recognised as critical by a Member State in accordance with the procedure set out in the Regulation, are referred to as “critical benchmarks” and are subject to additional requirements.
The Regulation introduces an authorisation and supervision framework for the providers of benchmarks (referred to in the Regulation as administrators). The Regulation envisages a recognition regime in respect of non-EU benchmark providers.
A notable aspect of the Regulation is the broad range of administrative measures and sanctions including monetary penalties that can be imposed on benchmark providers as well as the application of the Regulation to a broad range of regulated entities that use benchmarks.
Impact on the Funds Industry
Crucially for the investment funds sector, UCITS funds and alternative investment fund managers (AIFMs) may only use a benchmark for the purposes of tracking its return, computing performance fees or defining the asset allocation of a portfolio if that benchmark is provided by a benchmark provider authorised or recognised in accordance with the Regulation.
The administrative measures and pecuniary sanctions envisaged by the Regulation may be levied on UCITS funds and AIFMs that use benchmarks otherwise than in accordance with the Regulation.
The agreement reached on the proposed Regulation by the Parliament paves the way for three-way (trilogue) negotiations between the Parliament, the Council and the Commission. If political agreement is reached as a result of these negotiations, the Parliament will endorse the agreed position at a future plenary session. The Council must also formally approve the draft Regulation before it has the force of law. Once the Regulation enters into force, there will be a 12 months’ transitional period for the majority of its provisions.