Prepare for EU benchmark reform and risk-free rates

Background

The European Benchmarks Regulation (EBR) applies to administrators, contributors and users of benchmarks.

The EBR establishes a common regulatory framework, seeking to ensure benchmarks are produced in a robust and reliable manner, and to minimize conflicts of interest in the benchmark-determination process.

The regulation impacts indices across asset class, including fixed income, equity, interest rates, FX and commodities. An index becomes a benchmark within the scope of the EBR where:

  • it is used to determine the amount payable under a financial instrument or financial contract, or the value of a financial instrument
  • it is used to measure the performance of an investment fund for the purpose of: tracking the return
  • defining the asset allocation or a portfolio, or computing the performance fees

While the EBR entered into force on June 30, 2016, most provisions came into effect starting January 1, 2018. An initial transition period for existing benchmark providers runs until January 1 2020. Following industry concern, an additional extension was granted until the end of 2021 for critical and third-country benchmarks.

Key requirements for administrators

  • Obtain registration or authorisation with the administrator’s applicable National Competent Authority (or, for non-EU administrators, approval by means of the EBR’s Third Country Regime – Equivalence, Recognition or Endorsement)
  • Provide Benchmark Statements with applicable disclosure, including key elements of the methodologies
  • Maintain adequate systems, controls, governance and oversight, including managing conflicts of interest
  • Ensure integrity and reliability of input data


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EU Benchmarks Regulation Fact Sheet

Impact to benchmark users in the EU

In addition to administrators, the EBR also applies to benchmark users in the EU. Users include firms supervised under MiFID II, CRD IV, UCITS or one of the other EU regulations (as specified in Article 3(1)(17) of the EBR) that:

  • issue a financial instrument that references 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

Key compliance requirements include:

  • Benchmark users must ensure that they only use benchmarks that are provided by benchmark administrators included in the ESMA Benchmarks Register (authorized/registered EU administrators or qualifying third country administrators/benchmarks).
  • Benchmark users are required to maintain contingency measures setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided, including, if applicable, designating a fallback.
  • Benchmark users must add a disclosure to the relevant product prospectuses, stating whether the benchmark is provided by an administrator included in the ESMA register.

Key challenges for benchmark users

  • ESMA Register lists third country benchmarks that have been endorsed for use in the EU, provided by third country administrators that have been recognized or whose local regulatory scheme has been deemed equivalent. But the register does not include the specific benchmarks of authorized/registered EU administrators. Accordingly, mapping index level data to administrators is critical.
  • Transition period for EU users and administrators of non-critical benchmarks runs until January 1, 2020: interim data solutions are needed for users
  • Benchmark statements list benchmark families: mapping individual indices to the relevant benchmark family level is not always a straightforward exercise
  • Third country approved benchmarks: potential cliff effect of non-compliant third country administrators after the extended deadline ends December 31, 2021
  • Symbology: most indices have no ISIN or strict naming convention; some have been found to have multiple ISINs
  • Dependency on IBOR migration to risk-free rates (e.g. €STR)

Other dependencies: UK FCA will publish own Benchmarks Register after Brexit. UK-based administrators will become third country benchmark administrators.

How Bloomberg can help

Benchmark regulation data solution

Bloomberg offers a simple and concise mechanism to identify registered and authorized administrators under ESMA, their index families and the universe of indices within each index family with relevant reference data to understand the type of index.

  • Golden Data Source for pre-trade compliance, product development, valuation and performance measurement
  • Input for Contingency Plans in case benchmarks materially change or cease to be produced: fallback benchmarks
  • Single source of data capturing a wide universe of indices across fixed income, equity, FX and commodities
  • Daily updates from the ESMA register and changes from benchmark statements on administrator websites
  • Delivery via files comprising the complete universe or per security using existing Data License technology with no local IT implementation
  • Bloomberg Regulatory Data covered by a Service Organization Control 3 (SOC 3) report from an independent auditor related to information related to our internal controls for security, availability, processing integrity and confidentiality of data.

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