EU: The EU Benchmarks Regulation

Question 1

Explain the purpose of the EU Benchmarks Regulation (BMR)

Answer 1

1. Addresses the risk that benchmarks was susceptible to manipulation. (Revealed by LIBOR and EURIBOR)
2. Ensure benchmarks are rubbished and reliable.
3. Minimise this conflict of interest in benchmark setting processes.

Question 2

Under the BMR regulation, what is the definition of a benchmark?

Answer 2

Acts as a reference point.

1. an index that helps track how well an investment fund is performing.
   For example, if a mutual fund compares its returns to the S&P 500, that index is the benchmark.

OR

2. any index that is used as reference to help determine payments (amount payable) or values in financial contracts or instruments.
   For example, if a loan’s interest rate is based on LIBOR, then LIBOR is the benchmark because it affects how much borrowers and lenders pay.

Question 3

With regards to the BMR, explain some concepts around benchmarks/ index

Answer 3

1. BMR defines an index as a figure that is publicly available and is regularly determined (by formula/ calculation)
2. Some benchmarks may fall within specific regimes under the BMR.
   E.g. regulated data benchmark (FTSE 100), a commodity benchmark or an interest rate benchmark (SONIA)
3. A single price or reference value is NOT a benchmark. (No calculation needed)
4. Benchmarks provided by the central bank or public authority that act as a benchmark for public policy purposes are exempt from the BMR.

Question 4

What are the three entities defined under the BMR?

Answer 4

1. Benchmark administrator.
2. Benchmark user.
3. Supervised contributor.

Question 5

One of the entities defined under the BMR is a “benchmark administrator”. Who is this?

Answer 5

1. Has control over the provision/supply of a benchmark used.
2. This benchmark is used in financial instruments traded on trading venues or via systematic internalisers in the EU.
3. Also used for mortgage or consumer credit contracts.
4. Also used to measure the performance of investment funds.

Question 6

One of the entities defined under the BMR is a “supervised contributor”. Who is this?

Answer 6

1. Authorised person that contributes input data to an administrator located in the EU.
2. They provide data that is not readily available to said administrator.
   E.g a bank providing interest rate data that helps calculate a benchmark like EURIBOR - bank is a supervised contributor.
3. Provides input data for the purpose of benchmark determination.

Question 7

One of the entities defined under the BMR is a “benchmark user”. Who is this?

Answer 7

An authorised person who:

1. Issues a financial instrument (stocks/bonds) that references/ linked to an index.
2. Determines the amount payable under a financial instrument/ mortgage/ consumer credit contract by referencing an index. (How much to pay for the financial product under the benchmark)
3. Is a party in mortgage or consumer credit contract the references an index to calculate payments (lender)
4. Provide a borrowing rate calculated as a spread/ mark-up over an index or a combination of indices which is solely used as a reference in a consumer credit contract whether the creditor is a party (offer loans where interest rates are based on a benchmark)

OR

5. Measure the performance of an investment fund through an index either to track the return of the fund or to define it asset allocation.

Question 8

The BMR groups benchmarks into six different types. What are these types?

Answer 8

1. Critical benchmarks.
2. Significant benchmarks.
3. Commodity benchmarks.
4. Regulated data benchmarks.
5. Interest rate benchmarks.
6. Non-significant benchmarks.

Question 9

Explain what “critical benchmarks” are under the BMR

Answer 9

1. Value of contracts depending on the benchmark is at least €500 billion.

OR

2. Benchmark has been recognised as critical in a EU member state. (Even if it doesn’t meet the €500b threshold)
3. Has a big impact on the economy

Question 10

Explain what “significant benchmarks” are under the BMR

Answer 10

1. Value of contracts depending on the benchmark is at least €50 billion.

OR

2. There are no/ very few market-led to substitutes. (Very few replacements for these benchmarks)

AND

3. There would be an impact on financial stability if the benchmark stopped to be produced.

Question 11

Explain what “commodity benchmarks” are under the BMR

Answer 11

Benchmark is based on price of physical goods e.g. gold, oil, land..

1. benchmark is based on an underlying asset, which is a commodity, as defined by MiFID II
2. Subject to the requirements set out in Annex II of the BMR, UNLESS they are data regulated benchmarks or are based on submissions of which the majority are supervised entities (price data comes from regulated financial companies e.g. banks)
3. Articles relating to significant and non-significant benchmarks do not apply to commodity benchmarks.

Question 12

Explain what “regulated data benchmarks” are under the BMR

Answer 12

1. Input data to the benchmark is provided directly from regulated venues/ markets (exchange/ trading platforms)
2. Certain provisions/rules of the BMR do not apply to regulated data benchmarks and they cannot be classified as critical

Question 13

Explain what “interest rate benchmarks” are under the BMR

Answer 13

1. Benchmark is determined on the basis of the rate at which banks may lend to, or borrow from, other banks or agents in the money markets
2. Subject to the requirements set out in Annex I of the BMR
3. Articles relating to significant and non-significant benchmarks do not apply here.

Question 14

Explain what “non-significant benchmarks” are under the BMR

Answer 14

1. Where the value of contracts underlying the benchmark is less than €50 billion.
2. The benchmark is not a commodity or interest rate benchmark.

Question 15

How does categorisation of benchmarks on the BMR help regulators?

Answer 15

1. Allows regulators to tailor regulatory requirements to the risk of each category.
2. For Critical benchmarks that used as a reference:
   A. If its more than €500 billion of financial instruments
   B. They must meet highest standards of integrity and accuracy.
   C. They have strictest requirements in BMR

Question 16

Within the three entities listed under the BMR. Who is the most impacted?

Answer 16

1. Benchmark administrators - requirement for their prior authorisation/ registration and ongoing supervision
2. Administrators are placed on a public register maintained by ESMA.
3. There is also a code of conduct for contributors of input data - they need to use robust methodologies and sufficient and reliable data

Question 17

Users of benchmarks who are already “supervised entities” (regulated firms) are also affected by the BMR. How?

Answer 17

1. Only use benchmarks if the benchmark/ administrator appears on the register of eligible benchmarks maintained by SMA.
2. Have “robust written plans” for what they would do if a benchmark materially changes or is no longer provided - should be client-facing terms and be provided to the firm’s regulator upon request
3. When issuing prospectuses on investment products referencing a benchmark - state whether the benchmark is provided by an administrator included on the ESMA register

Question 18

What are some of the consequences for not following the regulations set by the BMR?

Answer 18

National competent authorities can impose sanctions:

1. Fines
2. Non-financial sanctions

Question 19

After UK’s withdrawal from the EU, what is the UK version of the BMR?

Answer 19

1. UK has onshored the EU BMR as UK BMR
2. It is currently substantially the same as the EU BMR