Question

What do Funds and their managers need to consider in respect of the Benchmarks Regulation?

Answer

As highlighted in the April 2016 Front Page:

  • The Benchmarks Regulation aims to contribute to the accuracy and integrity of benchmarks used in financial instruments and financial contracts by;Existing UCITS and AIFs will need to ensure that the benchmarks they use are working to comply with the Benchmarks Regulation or find an alternative.
    • ensuring that benchmark administrators are subject to prior authorisation and on-going supervision depending on the type of benchmark (e.g. commodity or interest-rate benchmarks);
    • improving the governance of benchmarks (e.g. management of conflicts of interest) and requiring greater transparency of how a benchmark is produced; and
    • ensuring the appropriate supervision of critical benchmarks, such as Euribor/Libor, the failure of which might create risks for many market participants and even for the functioning and integrity of markets of financial stability.
  • Supervised entities (including UCITS, UCITS ManCos, AIFs and AIFMs) will not be permitted to use unregulated benchmarks as a benchmark in the EU from 1 January 2018 (subject to transitional provisions).
  • Supervised entities (including UCITS, UCITS ManCos, AIFs and AIFMs) will only be permitted to use non-EU benchmarks as a benchmark in the EU if the benchmark is qualified under the third country regime (again, subject to transitional provisions).
  • UCITS prospectuses which reference a benchmark and which have been approved prior to 1 January 2018 will need to be updated at the next update and in any event by no later than 1 January 2019 to include information on the benchmark.
  • Supervised entities that issue financial instruments that reference a benchmark must produce "robust written plans" that set out the actions they would take should the benchmark materially change or cease to be produced. On request, these plans must be provided to the relevant competent authority.
  • The transitional provisions include that certain benchmark administrators who were providing benchmarks on 30 June 2016 will have until 1 January 2020 to apply for authorisation or registration.
  • The Benchmarks Regulation implements and is in line with the principles for oil price reporting agencies and financial benchmarks agreed at international level by the International Organization of Securities Commissions (IOSCO) in 2012 and 2013.
  • ESMA published a Q&A on practical issues regarding the implementation of the Benchmarks Regulation. It contains 2 Q&A which look at;
    • transitional provisions applicable to EU index providers already providing a benchmark on 30 June 20; and
    • transitional provisions applicable to an EU index provider that was not providing a benchmark on 30 June 2016 and starts to provide benchmarks between 1 July 2016 and 31 December 2017.