The vast majority of the provisions under the EU Benchmarks Regulation (the "BMR") come into effect on 1 January 2018. The BMR establishes a new regime for the authorisation and supervision of administrators of financial benchmarks that are used in the EU. Benchmark administrators will be required to comply with a number of obligations, including governance, oversight and control requirements, as well as requirements relating to benchmark methodology. Benchmark administrators located outside the EU will also be subject to the BMR if a benchmark they administer is used within the EU.
Application and Impact of the BMR
The BMR will apply to a wide range of financial instruments where any amount payable thereunder is determined by reference to an index or other figure that is published or made available to the public, and that is regularly determined by reference to a formula or other method of calculation and on the basis of the value of one or more underlying assets or prices, including actual or estimated interest rates.
The BMR is likely to have a particular impact on structured products offerings within the EU as many of these are likely to come within the definition of "financial instrument" and incorporate a benchmark within the scope of the BMR. There are, however, significant transitional provisions that will enable many existing benchmark administrators to continue to provide benchmarks in the EU until 1 January 2020, even without authorisation or registration under the BMR.
EU Benchmark Administrators and Transitional Relief
For benchmark administrators located in the EU, the BMR provides that any index provider that was providing a benchmark in the EU on 30 June 2016 (the date the BMR came into force) must apply for authorisation or registration under the BMR by 1 January 2020. In Technical Advice and in a Q&A document, the European Securities and Markets Authority ("ESMA") has confirmed that EU-based administrators that were providing benchmarks in the EU as of 30 June 2016 may continue to provide benchmarks in the EU (including new benchmarks developed after January 2018) up until 1 January 2020 unless and until the authorisation or registration of the benchmark administrator under the BMR is refused. However, in relation to EU benchmark administrators that only commenced providing a benchmark in the EU after 30 June 2016, ESMA construes the transitional provisions as meaning that in relation to benchmarks that such administrator started providing between 1 July 2016 and 31 December 2017, it can continue to provide such benchmarks up until 1 January 2020 unless and until the authorisation or registration of such administrator is refused. However, any such administrator cannot provide any benchmark created on or after 1 January 2018 in the EU unless it obtains authorisation or registration under the BMR.
Non-EU Benchmark Administrators and Transitional Relief
Different provisions apply in respect of non-EU administrators. There are three routes by which such administrators can have their benchmarks used in the EU: (i) the non-EU administrator is located and subject to supervision in a jurisdiction that the EU Commission has determined has equivalent regulation to the BMR (no such determination has yet been made in respect of any jurisdiction), (ii) the non-EU administrator is recognised by its EU member state of reference (to be determined by specified criteria) as complying with the majority of the provisions of the BMR or (iii) one or more benchmarks administered by such non-EU administrator are endorsed by an EU-supervised entity which has a clear and well-defined role within the control or accountability framework of the non-EU administrator and is able to monitor the provision of the relevant benchmark.
Transitional provisions under the BMR state that any benchmark provided by a non-EU administrator can still be used in the EU after 1 January 2018 if such benchmark is already used in the EU as a reference for financial instruments. ESMA had originally taken the view in Technical Advice that for this purpose, the reference to benchmarks "already used" should be interpreted as meaning a benchmark in use in the EU as of 1 January 2018, meaning that non-EU administrators would not be able to rely on the transitional relief for benchmarks used in the EU for the first time after 1 January 2018. This caused concern among many non-EU administrators as EU competent authorities cannot make a formal recognition determination until after 1 January 2018 (although some, including the UK FCA, have been allowing applications to be submitted in advance).
ESMA then published a revised Q&A document on 8 November 2017 which changed its position. ESMA now states that for the purpose of the transitional provisions relating to non-EEA benchmarks, the term "already used" should instead be interpreted as meaning where the benchmark is already used in the EU on or before 1 January 2020. This revised interpretation therefore allows any non-EU administrators to continue to administer both existing and new benchmarks in the EU up until 1 January 2020. The revised ESMA guidance is considered surprising by many market participants as it puts non-EU administrators in a better position than EU administrators who were not providing an index in the EU as of 30 June 2016. The Q&A is, however, intended to operate as "level 3" guidance under the BMR and market participants should therefore be able to rely on ESMA's revised guidance.
Although this gives immediate relief to non-EU benchmark administrators in respect of both existing and new benchmarks to be used in financial instruments, we would recommend that such administrators start giving consideration to whether an application for recognition or endorsement of relevant benchmark(s) should be made. It should be noted that (in contrast to the position for EU administrators) even if such an application is not successful, the benchmark can still benefit from the transitional provisions up until 1 January 2020.