The European Commission ("Commission") published a public consultation document1 in October 2019 relating to the review of Regulation (EU) 2016/1011 (the "Benchmark Regulation"). Under the Benchmark Regulation, the Commission has to review and report to the European Parliament and to the Council by January 1, 2020 on the functioning and effectiveness of various aspects of the Benchmark Regulation, as well as on the operation of third-country benchmarks in the EU.
Broadly, the consultation covers the following areas:
- Critical benchmarks
- Authorization and registration
- Scope of the Benchmark Regulation
- ESMA register of administrators and benchmarks
- Benchmark statement to be published by administrators
- Supervision of climate-related benchmarks
- Commodity benchmarks
In the context of the ongoing reforms applicable to inter-bank offered rates (IBORs), EU competent authorities may in future be faced with the situation that a particular IBOR is no longer representative of the market or economic reality it is intended to measure, for example, because one or more contributors is withdrawing from the IBOR's panel. In such a situation, the Benchmark Regulation empowers the competent authority, inter alia, to require a change to the benchmark's methodology or to its other rules.2 The consultation asks whether competent authorities should be given broader powers to require an administrator to change the methodology of a critical benchmark. It also asks whether there are any other amendments to Article 23(6)(d) (Mandatory contribution to a critical benchmark) that would improve the robustness, representativeness, and reliability of a benchmark.
If it considers the input data to the critical benchmark to be no longer representative of the market or economic reality, an administrator is required either to change the input data, contributors, or methodology to preserve the representativeness of the critical benchmark, or to cease provision of the benchmark.3 In cases where an immediate cessation of the benchmark could lead to market instability, the consultation recognizes that it is useful for a competent authority to have the power to compel a change to the benchmark's methodology (alongside the existing power to compel continued publication for a period of time),4 in which case the consultation asks whether such corrective powers should be given also when the administrator has indicated the intention to cease publication of the benchmark, and not just when mandatory contributions to a critical benchmark are triggered.
ORDERLY CESSATION OF A CRITICAL BENCHMARK
The Benchmark Regulation requires benchmark administrators to publish their contingency plans for changes to or cessation of their benchmarks,5 in order to avoid disruption to users and the financial markets when the benchmarks are materially changed or ceased to be published. The consultation seeks the view of the public as to whether such plans should be approved by national competent regulators. In the case of supervised entities, the consultation also asks whether those entities should provide contingency plans to cover circumstances where a critical benchmark is no longer representative of the underlying market, not just where a benchmark materially changes or ceases to be published.
There are currently three critical benchmarks subject to the supervision of colleges set up in accordance with the Benchmark Regulation: EURIBOR, EONIA, and LIBOR. A supervisory college is made up of the competent authority for the relevant administrator, the European Securities and Markets Authority (ESMA), the competent authorities responsible for the supervision of each of the members of the panel of the critical benchmark, and the competent authorities for the EU member states for which the benchmark is of particular importance. The consultation asks whether the current structure of the supervisory colleges for critical benchmarks continues to be appropriate.
AUTHORIZATION AND REGISTRATION
AUTHORIZATION, SUSPENSION, AND WITHDRAWAL
Article 35 of the Benchmark Regulation allows a competent authority to withdraw or suspend the authorization or registration of an administrator in certain circumstances, following which the use of all benchmarks provided by such administrator would be prohibited (unless the exception under Article 35(3) of the Benchmark Regulation (see discussion below) applies). The consultation suggests that it may be necessary to clarify that a competent authority should also have the option to withdraw or suspend authorization or registration in respect of one or more individual benchmarks provided by such administrator rather than suspending the administrator, and seeks the public's view as to whether the current Benchmark Regulation is sufficiently clear that the competent authority has such an option.
CONTINUED USE OF NON-COMPLIANT BENCHMARKS
National competent authorities currently have power under Article 35(3) of the Benchmark Regulation to allow for the continued use of benchmarks provided by a suspended administrator in legacy contracts in certain circumstances. The consultation suggests that extending this power to allow the use of benchmark in legacy contracts where the administrator has had its authorization withdrawn (and not just suspended) may be useful. The Benchmark Regulation also allows for the use of non-compliant benchmarks in cases where their cessation or changes would result in a force majeure event, or would frustrate or otherwise breach the terms of any financial contract, instrument, or the rules of any investment fund that references that benchmark.6 The consultation asks whether stakeholders consider the current powers in the Benchmark Regulation allowing for the use of non-compliant benchmarks in these specified circumstances to be sufficient.
The preamble to the Benchmark Regulation states that the scope of the Benchmark Regulation should be "as broad as necessary to create a preventive regulatory framework," and applies to all types of benchmarks regardless of their underlying markets. However, during its exercise of assessing third country jurisdictions with the aim of granting equivalence, the Commission has noticed that certain third countries have adopted an approach where supervision and regulation is restricted only to the most critical or systemic financial benchmarks administered in the relevant jurisdiction. The consultation seeks to review the scope of the Benchmark Regulation, in terms of its application to non-significant benchmarks, whether the quantitative thresholds (and their calculation methods) currently used to establish the categories of benchmarks (nonsignificant, significant, and critical) are appropriate, whether any alternative methodology (or combination) would be useful, and whether there should be an alternative approach to certain benchmarks that are less prone to manipulation (such as regulated data benchmarks).
ESMA REGISTER OF ADMINISTRATORS AND BENCHMARKS
ESMA maintains a register listing benchmark administrators that have either been authorized or registered in the EU, as well as benchmarks and administrators approved for use in the EU through equivalence, recognition, or endorsement. However, benchmark users have commented that the functioning of the register could be improved; for example, it is difficult to identify benchmarks that are authorized or registered for use in the EU, as the register only lists an EU-authorized or EU-registered administrator but not the administrator's benchmarks, yet it is possible for certain administrators that operate on a global basis to apply for authorization or registration in respect of certain benchmarks only. On the other hand, the Commission noted that it would be challenging to maintain an up-to-date list of benchmarks approved for use in the EU in respect of large administrators with a constantly changing portfolio of benchmarks. The consultation seeks the view of users on their experience with the register, how it may be improved, and whether benchmarks should be listed in addition to (or instead of) the current list of EU-authorized or EU-registered administrators.
A benchmark statement is intended to provide key information that allows its users to understand the economic reality such benchmark (or family of benchmarks) is measuring, and the risks of such benchmarks. However, the form and content of the benchmark statements vary among the administrators, which impedes comparability. Some administrators prepare a benchmark statement for each benchmark, whilst others consolidate information for a family of benchmarks that may comprise thousands of benchmarks. Often there are overlaps between the benchmark statement and the benchmark methodology, which reduces their usefulness.
The consultation asks stakeholders to share their experience with the benchmark statement, any recommendation on improving the format and content, and whether to maintain the option to allow for the benchmark statement to be prepared either at the benchmark or at the family level.
When the amending regulation to the Benchmark Regulation7 (the "Amending Benchmark Regulation") relating to climate-related benchmarks is published, there will be further clarity relating to objectives of the benchmark statements, and a requirement for standardized disclosure of Environmental, Social, and Governance (ESG) information for all benchmarks (except currency and interest rate benchmarks) in the benchmark statement.
SUPERVISION OF CLIMATE-RELATED BENCHMARKS
The Amending Benchmark Regulation, when published, will introduce two new types of "climaterelated benchmarks" and the qualifying criteria for each: the EU Paris-aligned Benchmark and the EU Climate Transition Benchmark. The Amending Benchmark Regulation will also require ESG disclosures for all investment benchmarks (other than currency and interest rate benchmarks). The minimum standards relating to these two benchmarks as well as the content of ESG disclosures will be further specified in delegated acts to be adopted in early 2020.
In order to give effect to the Amending Benchmark Regulation, the Commission considers that national competent authorities should be given powers that will allow them to effectively monitor the investment firm or fund manager that offers products that reference a climate-related benchmark, as well as any investment strategy that references it, in order to verify that (a) the chosen benchmark is compliant with the requirements in the Amending Benchmark Regulation, and (b) the relevant investment strategy aligns with the chosen benchmark.
The consultation seeks the view of the public as to whether the competent authorities should have explicit powers relating to the above.
The consultation highlights two areas in relation to commodity benchmarks that it would like to address:
- Currently, commodity benchmarks are subject to the requirements set out in Annex II of the Benchmark Regulation (Commodity Benchmarks) instead of those set out in Title II (Benchmark Integrity and Reliability) (except for Article 10 (Outsourcing)), unless such benchmark is a regulated-data benchmark or where a majority of its contributors are supervised entities. This latter case in particular has been criticized by benchmark providers.
In addition, Title II requirements will nevertheless apply to a critical benchmark where the underlying asset is gold, silver, or platinum.
There are currently no benchmarks that fulfil these criteria. The consultation therefore asks whether the existing conditions under which Title II requirements would apply continues to be appropriate.
- There is a de minimis threshold below which a benchmark is exempt from the Benchmark Regulation, provided that (a) instruments referencing the benchmark can only be admitted to trading on a single trading venue, and (b) the total notional amount of those instruments is less than or equal to 100 million. Due to seasonal effects, it is possible for a benchmark's usage to exceed the threshold at one point during the year but fall below the threshold again during the same year. The consultation asks whether this compound de minimis threshold is appropriately set.
From January 2022, EU-supervised entities can only use benchmarks provided by administrators located in a third country if (a) the Commission has adopted an equivalence decision, (b) the benchmark administrator has been recognized by an EUcompetent authority, or (c) the benchmark has been endorsed by an EU-supervised entity. Of these conditions:
- the Commission commented that equivalence may not allow for the continued use of a majority of the indices administered outside the EU where the country in question has only applied the IOSCO-compliant benchmark rules in respect of systemic or critical benchmarks; and
- recognition by the EU-competent authority will require the relevant benchmark administrator to have a legal representative in the EU. Stakeholders have said that the tasks and responsibilities of the legal representative will need to be clarified further.
There is a risk that third-country administrators will not have any incentive to seek recognition or endorsement in order for their benchmarks to be used in the EU, which means that such third-country benchmarks can no longer be used by EU-supervised entities following the extended transition period.
Further, certain FX spot rates for currencies that are not fully convertible will not comply with the conditions set out under the Benchmark Regulation, which means they cannot be used in calculating the payments due for EEA-listed non-deliverable forwards from January 2022.
The consultation wishes to find out the extent of the impact of the FX spot rate issue on stakeholders, and would like recommendations for improving the procedures relating to the granting of equivalence, recognition, or endorsement in respect of thirdcountry benchmarks.
The consultation closes on December 6, 2019. The Commission will consider the responses to this consultation in its report to the European Parliament and to the Council to be delivered by January 1, 2020, as well as in a separate report concerning the operation of third-country benchmarks in the EU to be delivered by April 1, 2020.