More than three years after the European Benchmark Regulation ("BMR") entered into force, the European Commission ("EC") has kicked off the required official review of its functioning. With most of the provisions only applying from January 2018, and the transitional period for full application to EU Benchmarks ("BMs") only ending on 1 January 2020, this exercise might feel somewhat premature. However, it presents a great opportunity to now consider and address some issues that have become apparent and hampered the BMR's functioning.

Scope of the BMR

As an FCA authorised Benchmark Administrator ("BMA"), we consider the BMR generally as a sensible, proportionate framework to ensure the proper functioning of indices used as benchmarks, references that play an important role for the functioning of EU financial markets. We also support Europe's broad regulatory perimeter for BMs, given that the BMR's requirements protecting investors are as relevant for any less widely used BMs as they are for the systemically important ones.

The EC's Consultation raises questions about the scope of the BMR and the appropriateness of the thresholds used to categorise BMs. Importantly, whilst the notional amount of use of a BM is a key driver of its systemic importance and of the proportionate application of the BMR requirements, it should not determine the regulatory perimeter. In the interest of securing investor protection and market confidence, any determination defined as a "Benchmark" should be in scope of the regulation, whether the related financial instruments trade on venue or over-the-counter or whether the number of investors that access the benchmark is limited or not. Only on this basis can regulators ensure that potential conflicts of interest that often arise as part of BM administration are appropriately managed, its methodology and input data are sufficiently robust, and appropriate governance and controls are in place. One could even argue that for BMs used "only" in structured products that are sold to a limited number of investors or "only" for self-indexing by fund managers, potential conflicts of interest are the greatest and the least well monitored. Notably, investor protection considerations seem to be the drivers of the US SEC's initiative on regulation of indices in the United States. It is therefore important to not only maintain the current regulatory perimeter of the EU BMR generally but also to address emerging loopholes to the BMR's scope.

Benchmark register

As of today, authorisations for EU BMAs are provided on the entity level. Further, as ESMA's Benchmark register does not provide any details of the BMs that are administered by EU BMAs, users will not know which of the BMA's products are administered in accordance with the EU BMR and which ones aren't. Additional transparency in this area would be useful. ESMA could publish a list of EU BMs in line with their approach to 3rd country BMs. However, we believe that, given the large number of BMs and frequent changes, BMAs are probably in the best position to publish and regularly update their own list of EU BMR BMs and so responsibility should fall to them. This transparency on the BM level can then also be accompanied with supervisory ability to withdraw authorisation for specific BMs, rather than only for the BMA entity overall, a desirable option in particular in the context of administration of Critical BMs.

Commodity Benchmarks

For commodity BMs, a more simplified determination of the regulatory perimeter and whether they would be subject to the requirements in Title II or Annex II of the BMR would indeed be desirable. Specifically, we support the EC's review of the parameters used to determine whether Commodity BMs should be in scope of the BMR, in particular where the use of such variables could have a negative impact on competition or discourage submissions.

Non-EEA Benchmarks

The BMR contains several paths that allow 3rd country BMAs to offer their BMs in the EU. However, concerns about the viability of these options and use of BMs that had previously not been considered in this context led to EU legislators to extend the transitional period for 3rd country BMs for another 2 years. Now is the time to decide on a number of Level 1 changes that would ensure a workable 3rd country regime that provides EU firms with continued access to 3rd country BMs, whilst re-establishing a level playing field between EU and 3rd country BMAs, closing the potential for BMAs to offshore production to evade regulatory requirements, and safeguarding investor protection.

Firstly, BMR should provide specific exemptions in cases where existing options are not viable, for example for FX-NDFs and all public authorities that are providers of 3rd country BMs. Secondly, the EC might want to consider granting exemptions for 3rd country BMAs dependent on certain types of BMs (e.g. for a regulated data BM with limited use in the EU) or temporary de-minimis exemptions for 3rd country BMs so new BMs can easily be taken up in the EU while more robust protections can be put in place in due course. Thirdly, for 3rd country commercial index providers whose indices are more widely used in the EU, streamlining of the endorsement and recognition options is desirable to reduce uncertainties and allow for their more effective use. Specifically, endorsement and recognition should be provided only by regulated EU BMAs, and relevant IOSCO compliance should be demonstrated via an external audit.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.