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Benchmarks

Benchmarks

The Benchmarks Regulation introduces a regime for benchmark administrators that will ensure the accuracy and integrity of benchmarks. ESMA will develop draft regulatory technical standards (RTS) and implementing technical standards (ITS) on a large number of areas, and also provide the Commission with Technical Advice. 

ESMA will coordinate the  supervision of benchmark administrators by national competent authorities. For critical benchmarks, a college of national supervisors including ESMA will be set up and take key decisions.

Background

The European Commission proposed a draft Regulation “on indices used as benchmarks in financial instruments and financial contracts”(Benchmarks Regulation) in September 2013 in the wake of the manipulation of various benchmarks. On 24 November 2015, the European Parliament and the Council reached a preliminary political agreement on a compromise text of the Benchmarks Regulation, an agreement that was confirmed on 9 December 2015 by the Permanent Representatives Committee of the Council of the European Union. The European Parliament voted and approved the text of the Benchmarks Regulation in its plenary session on 28 April 2016. The Council adopted the same text on 17 May 2016. The text of the Benchmarks Regulation was published in the European Official Journal on 29 June 2016, and entered into force the following day. It is entering into application on 1 January 2018.

Focus

The Benchmarks Regulation has the following objectives:

  • Improving governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately;
  • Improving the quality of input data and methodologies used by benchmark administrators;
  • Ensuring that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest;
  • Protecting consumers and investors through greater transparency and adequate rights of redress.

The Benchmarks Regulation will introduce a code of conduct for contributors of input data requiring the use of robust methodologies and sufficient and reliable data. In particular, it calls for the use of actual transaction input data where possible. But other data may be used if the transaction data is insufficient. The scope of the Benchmarks Regulation is broad, although benchmarks deemed to be critical will be subject to stricter rules, including the power for the relevant competent authority to mandate contributions of input data. Administrators (i.e. providers) of benchmarks will have to apply for authorisation  / registration and will be subject to supervision by the competent authority of the country in which they are located.  If an administrator does not comply with the provisions of the Benchmarks Regulation, the competent authority may withdraw or suspend its authorisation / registration. Administrators will be required to have in place appropriate governance arrangements and controls to avoid conflicts of interest.

ESMA will coordinate the  supervision of benchmark administrators by national competent authorities. For critical benchmarks, a college of national supervisors including ESMA will be set up and take key decisions (see dedicated section below).

Technical standards

The Benchmarks Regulation empowers ESMA to develop draft regulatory technical standards (RTS) and implementing technical standards (ITS) on the following areas:

  • Procedures, characteristics and positioning of oversight function to avoid conflicts of interest (RTS)
  • Appropriateness and verifiability of input data, internal oversight and verification procedures of contributors (RTS)
  • Information to be provided by administrators for transparency of methodology (RTS)
  • Specification of elements of the contributor code of conduct (RTS)
  • Governance and control requirements for supervised contributors, systems and controls (RTS)
  • Template for compliance statement for significant benchmarks (RTS)
  • Specification of qualitative criteria for significant benchmarks (RTS)
  • Template for compliance statement for non-significant benchmarks (RTS)
  • Contents of benchmark statement and cases in which update is required (ITS)
  • Minimum content for cooperation arrangements with third country NCAs  (RTS)
  • Form and content for the application for recognition by third country administrators (RTS)
  • Information to be provided in applications for authorisation and registration (RTS)
  • Procedures and forms for exchange of information with NCAs (RTS)

ESMA is requested to submit the draft technical standards to the European Commission by nine months after the entry into force of the Benchmarks Regulation.

Technical Advice

On 11 February 2016 ESMA received a request from the European Commission for technical advice on possible delegated acts. The request for technical advice covers the following areas:

  • how to specify: what constitutes making available to the public for the purposes of the definition of an index, what constitutes administering the arrangements for determining a benchmark, what constitutes the issuance of a financial instrument for the purposes of defining use of a benchmark;
  • the appropriate measurement for measuring the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value of investment funds in both the direct case and also in case of the indirect reference to a benchmark within a combination of benchmarks;
  • how the criteria referred to in paragraph 1(c), subparagraph (iii), of Article 20 are to be applied (criteria for identifying critical benchmarks);
  • measures to determine the conditions on which the relevant competent authorities may assess whether there is objective reason for the provision of a benchmark or family of benchmarks in a third country and their endorsement for their use in the Union.
  • how to determine the conditions on which the relevant competent authority may assess whether the cessation or the changing of an existing benchmark to conform with the requirements of this Regulation could reasonably result in a force majeure event, frustrate or otherwise breach the terms of any financial contract or financial instrument which references such benchmark.

The technical advice should be delivered to the European Commission within four months after the entry into force of the Regulation.

Regulatory implementation

Under the Benchmarks Regulation, ESMA will publish:

  • the list of National Competent Authorities responsible for carrying out the duties under the Benchmarks Regulation;
  • a register of administrators and third country benchmarks, in accordance with Article 36 of the Benchmarks Regulation. ESMA will start publishing this list of Administrators and third country benchmarks as of 1 January 2018 the date of entry into application of Article 36 of the Benchmarks Regulation. Please click here to access the list. The list will be published through an excel file starting from 1 January 2018 and until Q3 2018 when the final register interface will be available.

Colleges for critical benchmarks

According to Article 46 of the Benchmarks Regulation, within 30 working days from the inclusion of a benchmark in the so called “list of critical benchmarks”, to be issued by the European Commission, the national competent authority of that benchmark will establish a college including (at least) also ESMA and the national competent authorities of supervised contributors to the benchmarks.