The European Supervisory and Markets Authorities (ESMA) issued a further update to its Q&A on the Benchmarks Regulation (BMR) on 27 September 2018. This latest edition of the Q&A contains two welcome clarifications for investment funds in respect of the requirements under Article 28(2) of the BMR. Article 28(2) requires supervised entities, such as investment funds, using a benchmark to produce and maintain "robust written plans" setting out the actions that they would take in the event that the benchmark materially changes or ceases to be provided. Supervised entities must also reflect these written plans in contractual relationships with their clients.

In the first instance, ESMA offered guidance as to the content of written plans that it would consider to be robust. The plans, which should be thorough and adequate in view of the nature and size of the relevant benchmark and be kept updated as appropriate, must cover:

  • operational procedures and detailed courses of action;
  • relevant communication channels; and
  • arrangements for different scenarios and contingencies.

Secondly, ESMA provided sensible practical guidance for investment funds on the requirement to reflect these written plans in contractual relationships with clients. ESMA stated that where prospectuses form part of the contractual arrangement between the investor and the fund, the fund can ensure compliance with this requirement by setting out in the prospectus the plan of action in the event of the cessation of or material change to a benchmark.

Prospectus updates have already been subject of ESMA’s Q&A on BMR issued earlier this year where ESMA set out its expectation that, prior to the end of 2018, prospectuses of all funds that use benchmarks should disclose whether or not the administrators of the benchmarks used by the funds are listed in the register of administrators and benchmarks maintained by ESMA.

The other clarifications contained in the 27 September update to ESMA's Q&A on BMR dealt with the following topics:

  • clarification of the reference to systematic internalisers in the definition of financial instruments in scope of BMR;
  • when banks issuing certificates classify as users of benchmarks;
  • classification of the NAV of an investment fund as input data and not as a benchmark;
  • the application for endorsement of a family of benchmarks;
  • the language in which benchmark statements should be published.

Actions for investment funds using benchmarks

  • Update the fund prospectus by the end of 2018 to state whether or not benchmarks used by the funds are listed in the register of administrators and benchmarks maintained by ESMA.
  • Reflect in the prospectus or otherwise in contractual arrangements with shareholders the plan of action in the event of the cessation or material change to a benchmark.