New European legislation will regulate the provision of, contribution to and use of a wide set of benchmarks.
The ‘Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds’ (EU Benchmarks Regulation) entered into force on 30 June 2016 and will apply in the UK from 1 January 2018. It will introduce a common framework and consistent approach to benchmarks regulation across the EU. It aims to ensure benchmarks are robust and reliable, and to minimise conflicts of interest in benchmark-setting processes.
What is considered a benchmark
The EU Benchmarks Regulation defines an index as a figure that is publicly available and is regularly determined, either by applying a formula to or making an assessment of a representative set of underlying data.
New requirements under the Regulation
The Regulation will introduce new regulatory requirements for index providers located in the EU that provide benchmarks used within the EU. Once their benchmarks are used, these providers will become benchmark administrators. They will be expected to apply to their competent authority for authorisation or registration. In the UK, the competent authority is the FCA.
Contributors to benchmarks do not require authorisation or registration under the Regulation. Firms that are already authorised under other EU rules will be subject to additional requirements. These firms are described as ‘supervised entities’.
Supervised entities are prohibited from using benchmarks provided by administrators that are not authorised or registered, or subject to the third country regime if the benchmark is provided outside of the EU. Supervised entities that use benchmarks are required to maintain written contingency plans.
When supervised entities contribute to benchmarks, they also become ‘supervised contributors’.
How this affects you
You may be a benchmark administrator if you provide indices that are used in:
- financial instruments traded on trading venues or via systematic internalisers in the EU
- mortgage or consumer credit contracts, or
- investment funds
You may be a supervised contributor under the Regulation if you are an authorised person and you:
- contribute input data that is not readily available to the administrator, and
- provide the input data for the purpose of a benchmark determination
You may be a benchmark user and be subject to additional requirements if you are an authorised person and you:
- issue a financial instrument that references an index
- determine the amount payable under a financial instrument or a mortgage or consumer credit contract by referencing an index
- are a party to a mortgage or consumer credit contract that references an index
- provide a borrowing rate calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference in a consumer credit contract to which the creditor is a party
- measure the performance of an investment fund through an index either to track the return of the fund or to define its asset allocation
We look forward to engaging with you on this issue, as the FCA is preparing for the application of the Regulation in the UK. If you are unsure whether or not you fall within the scope of the Regulation, or would like to be part of future engagement, contact us at email@example.com