"This Regulation introduces a common framework to ensure the accuracy and integrity of indices used as benchmarks in financial instruments and financial contracts, or to measure the performance of investment funds in the Union. This Regulation thereby contributes to the proper functioning of the internal market while achieving a high level of consumer and investor protection." (Article 1 of the Benchmark Regulation)
Key requirements for users of a benchmark
The Benchmark Regulation introduces the following key requirements for users of a benchmark*, unless one of the exemptions applies:
1) A supervised entity may only use a benchmark in the EU if the benchmark or the EU administrator is included in ESMA's public register.
2) Where a prospectus to be published under the Prospectus Directive or UCITS Directive concerns transferable securities or other investment products that reference a benchmark, the issuer, offeror, or person asking for admission to trade on a regulated market shall ensure that the prospectus also includes clear and prominent information stating whether the benchmark is provided by an administrator included in ESMA's public register.
3) Supervised entities that use a benchmark have to (i) produce and maintain robust written plans setting out the actions they would take when a benchmark would change or cease to be provided, and, where feasible and appropriate, nominating one or several alternative benchmarks and indicating why these would be suitable, (ii) reflect these plans in the contractual relationship with clients and (iii) upon request sent the plans and any updates to the competent authority.
What is a benchmark?
A 'benchmark' is, according to the Regulation:
Any index by reference to which:
- the amount payable under a financial instrument or a financial contract is determined;
- the value of a financial instrument is determined; or
- the performance of an investment fund is measured with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees.
The Regulation shall not apply to (amongst others):
- the provision of a single reference price for any financial instrument listed in section C of Annex I to MiFID II;
- a natural/legal person that grants or promises to grant credit in the course of that person's trade, business or profession, only insofar as that person publishes or makes available to the public that person's own variable or fixed borrowing rates set by internal decisions and applicable only to financial contracts entered into by that person or by a company within the same group with their respective clients.
The Regulation enters into force on 1 January 2018. However, a transitional regime may apply for the key requirements under 1) and 2), including:
1) Use of a benchmark
Supervised entities are allowed to continue to use an existing benchmark until 1 January 2020, or, where the relevant EU index provider (administrator) submits an application for authorisation or registration, unless and until such authorisation or registration is refused.
In the ESMA Q&A (as last updated on 29 September 2017), ESMA considers that this transitional regime should (also) apply to:
- any other benchmark of an EU index provider that was providing a benchmark before 30 June 2016, including those provided for the first time after 30 June 2016 (or 1 January 2018);
- any benchmark of an EU index provider that was not providing any benchmark before 30 June 2016, provided for the first time between 30 June 2016 and 1 January 2018.
In certain limited circumstances, continuing the use of existing benchmarks after 1 January 2020 may be permitted by the competent authority.
For a non-EU index provider (administrator) which has not yet been qualified under the third country regime of the Benchmark Regulation, the use of a benchmark of such provider, where the benchmark is already used in the EU, will only be permitted in a financial instrument or financial contract, or for measuring the performance of an investment fund, that already references the benchmark or which adds a reference to the benchmark, prior to 1 January 2020. It is not yet clear if this applies only to benchmarks used before 30 June 2016 or (in line with the ESMA Q&A referred to above) also to benchmarks used before 1 January 2018.
2) Disclosure in prospectus
The disclosure requirement with respect to a prospectus does not apply to outstanding prospectuses approved under the Prospectus Directive prior to 1 January 2018.
For prospectuses approved prior to 1 January 2018 under the UCITS Directive, the underlying documents have to be updated at the first occasion or at the latest within 12 months after that date.
Changes to Mortgage/Consumer Credit Directive
The Benchmark Regulation also amends the:
Mortgage Credit Directive (to be adopted and applied by 1 July 2018):
- Where contracts reference a benchmark, the names of the benchmarks and of their administrators and the potential implications on the consumer, have to be provided to the consumer (will be implemented in the Netherlands in Article 51b(f) BGfo).
- This requirement shall not apply to mortgage credit agreements existing before 1 July 2018.
Consumer Credit Directive (to be adopted and applied by 1 July 2018):
- Where the credit agreement references a benchmark, the name of the benchmark and of its administrator and the potential implications on the consumer shall be provided by the creditor, or where applicable, by the credit intermediary, to the consumer in a separate document, which may be annexed to the Standard European Consumer Credit Information Form (will be implemented in the Netherlands in Article 112(4) BGfo).
- The Benchmark Regulation does not explicitly provide, like in respect of the Mortage Credit Directive, that the above requirement does not apply to credit agreements existing before 1 July 2018. However, as the information on benchmarks will be required to be provided pre-contractually, this will essentially mean that the above requirement will also not apply to credit agreements under the Consumer Credit Directive existing before 1 July 2018.
In case of non-compliance with the above requirements, national authorities will have the power to impose several administrative sanctions (or in some cases even criminal sanctions), including, amongst others:
- Financial penalties, such as a maximum fine of EUR 1 million or, if higher, 10% of the annual turnover.
- Non-financial penalties, such as a temporary prohibition on the exercise of professional activity and a public warning.
* This factsheet does not set out the requirements under the Benchmark Regulation for administrators or contributors.
Annex - definitions
A natural or legal person that has control over the provision of a benchmark.
A natural person who, in financial contracts covered by the Benchmark Regulation, is acting for purposes which are outside his or her trade, business or profession.
- a central bank (ESMA considers this to include both EU central banks and non-EU central banks);
- a public authority, where it contributes data to, provides, or has control over the provision of, benchmarks for public policy purposes, including measures of employment, economic activity, and inflation;
- a CCP, where it provides reference prices or settlement prices used for CCP risk-management purposes and settlement;
- the press, other media and journalists where they merely publish or refer to a benchmark as part of their journalistic activities with no control over the provision of that benchmark;
- a commodity benchmark based on submissions form contributors the majority of which are nonsupervised entities and in respect of which both of the following conditions apply:
- the benchmark is referenced by financial instruments for which a request for admission to trading has been made on only one trading venue, as defined in point (24) of Article 4(1) of MiFID II, or which are traded on only one such trading venue;
- the total notional value of financial instruments referencing the benchmark does not exceed EUR 100 million;
- an index provider in respect of an index provided by said provider where that index provider in unaware and could not reasonably have been aware that that index is used for the purposes referred to in point (3) of Article 3(1) Benchmark Regulation.
Any credit agreement as defined in the Consumer Credit Directive (Article 3(c)) or in the Mortgage Credit Directive (Article 4(3)).
Any of the instruments listed in Section C of Annex I of MiFiD II:
- for which a request for admission to trading on a trading venue (as defined in Article 4(1)(24) of MiFiD II) has been made; or
- which is traded on a trading venue (as defined in Article 4(1)(24) of MiFiD II) or via a systematic
internaliser (as defined in Article 4(1)(20) of MiFiD II).
Section C of Annex I of MiFiD II includes:
- transferable securities;
- money-market instruments;
- units in collective investment undertakings;
- options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
- options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;
- options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products traded on an OTF that must be physically settled;
- options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in the foregoing category and not being for commercial purposes, which have the characteristics of other derivative financial instruments;
- derivative instruments for the transfer of credit risk;
- financial contracts for differences;
- options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this list, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, OTF, or an MTF;
- emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/87/EC (Emissions Trading Scheme).
- that is published or made available to the public
- that is regularly determined:
- entirely or partially, by the application of a formula or any other method of calculation, or by an assessment; and
- on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys.
"Made available to the public" will be further defined in a Commission Delegated Regulation.
A natural or legal person that has control over the provision of an index.
An alternative investment fund (AIF) as defined in the AIFMD (Article 4(1)(a)) or a UCITS as defined in the UCITS Directive (Article 1(2)).
Single reference price:
According to the ESMA Q&A (as last updated on 29 September 2017): "prices that are only reflecting the value of 'any financial instrument'. With its singular use of the term, the exclusion would not cover e.g. a basket of securities or an index based on the price of more than one financial instrument. Similarly, (...) single prices or single value reference prices should not be considered benchmarks (...) and it includes the example of a price of a single security the provision of which does not include any calculation, input data or discretion."
- a credit institution as defined in the CRR (Article Article 4(1)(1));
- an investment firm as defined in MiFID II (Article Article 4(1)(1));
- an insurance undertaking as defined in Solvency II (Article 13(1));
- a reinsurance undertaking as defined in Solvency II (Article 13(4));
- a UCITS as defined in the UCITS Directive (Article 1(2)) or, where applicable, a UCITS management company as defined in the UCITS Directive (Article 2(1)(b));
- an alternative investment fund manager (AIFM) as defined in the AIFMD (Article 4(1)(b));
- an institution for occupational retirement provision as defined in the Pension Funds Directive (Article 6(a));
- a creditor as defined in the Consumer Credit Directive (Article 3(b)) for the purposes of credit agreements as defined in the Consumer Credit Directive (Article 3(c));
- a non-credit institution as defined in the Mortgage Credit Directive (Article 4(10)) for the purposes of credit agreements as defined in the Mortgage Credit Directive (Article 4(3));
- a market operator as defined in MiFID II (Article 4(1)(18);
- a CCP as defined in EMIR (Article 2(1));
- a trade repository as defined in EMIR (Article 2(2)); - an administrator.
Use of a benchmark:
- issuance of a financial instrument which references an index or a combination of indices;
- determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices;
- being a party to a financial contract which references an index or a combination of indices;
- providing a borrowing rate (as defined in the Consumer Credit Directive) calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference in a financial contract to which the creditor is a party.
- measuring the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio, or of computing the performance fees.