European Benchmarks Regulation (BMR) Review
On October 17, 2023, the European Commission proposed a review of the Benchmarks Regulation to streamline reporting requirements in financial services legislation. It highlighted the broad scope of the BMR and low uptake of licensing routes for third-country benchmark administrators.
The European Commission published a proposal on October 17, 2023, for the review of the European Benchmarks Regulation (BMR), marking a major advancement. A key component of the Commission's all-encompassing plan to streamline reporting requirements inside the confines of European financial services legislation is this proposal. Though the Commission acknowledged that the present BMR has a broad reach, around 90% of benchmark administrators registered in the EU mostly offer non-significant benchmarks. In addition, the Commission clarified that just 5% of the third-country benchmark administrators who were identified chose to use the BMR's licensing options—such as equivalency, recognition, or endorsement—instead of depending on transitional arrangements.
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Alessandro Micagni
Proposed Changes to the Scope of the European Benchmarks Regulation (BMR)
In an effort to streamline the European Benchmarks Regulation's (BMR) scope, the European Commission has proposed revisions to the law. The proposal states that only significant and critical benchmarks, as well as EU Climate Transition and EU Paris-aligned Benchmarks, will be covered by the BMR. Two techniques are offered to identify meaningful benchmarks: a designation regime and a threshold-based approach. Administrators of non-significant benchmarks would no longer be subject to registration requirements under this modification. In addition, considering the anticipated reduction in the scope of the BMR, the Commission recommends doing away with the current particular exemption system for spot foreign exchange benchmarks. The goal of these proposed modifications is to improve benchmark regulation's efficacy and efficiency within the European financial services sector, marking a substantial shift in regulatory focus.
EU Climate Benchmarks: Compliance and Proposed Improvements
In relation to the supply of EU Climate Transition and EU Paris-aligned Benchmarks, the European Commission lays out important clarifications and suggested changes. These benchmarks are essential for bringing the financial markets into line with sustainability objectives. The Commission discusses suggested modifications and regulatory requirements in order to improve benchmark provision's efficacy and clarity:
- Administrative Requirements: EU Climate Transition and EU Paris-aligned Benchmarks may only be provided by administrators who are registered or authorized under the European Benchmarks Regulation (BMR). This stipulation guarantees adherence to regulatory guidelines and fosters market integrity.
- Deadline Consideration: The Commission recognizes that the EU Climate Transition and EU Paris-aligned Benchmarks have passed, and that administrators of major benchmarks no longer need to "endeavour to provide" them by January 1, 2022. The Commission suggests eliminating this requirement from the BMR in response.
- Regulatory clarification: In order to bring clarification and conformity with the existing regulatory frameworks, the deadline requirement is being proposed to be deleted. This modification guarantees uniformity and expedites the adoption of sustainability standards in the financial sector.
- Sustainability Integration: Encouraging sustainability and coordinating financial activities with climate goals are made possible by the EU Climate Transition and EU Paris-aligned Benchmarks. The Commission is in favor of integrating sustainability issues into financial markets and encouraging responsible investment practices by reducing regulatory processes and standards.
Threshold-Based Criteria
The European Commission suggests using a threshold-based method to assess how important benchmarks are inside the EU. The goal of this strategy is to find benchmarks with significant market influence in a clear and consistent manner. Administrators of benchmarks are required to follow certain guidelines and notify the appropriate regulatory bodies when benchmarks exceed predetermined thresholds.
Key Criteria:
- Use as Financial Reference: If benchmarks are used, directly or indirectly, in the EU as references for financial products or contracts, they are considered significant.
- Total Average Value: For a benchmark to be deemed noteworthy, it must have a cumulative average value of at least EUR 50 billion over a six-month period, spanning all maturity ranges or tenors.
- Notification Requirement: Benchmark administrators are required to notify the European Securities and Markets Authority (ESMA) or the Member State competent authority (NCA) in the event that the aggregate use of one of their benchmarks surpasses the BMR's defined threshold.
By employing these threshold-based criteria, the Commission aims to ensure transparency and accountability in benchmark usage, enhancing the integrity and efficiency of financial markets within the EU.
Regulatory Oversight and Criteria
The designation of noteworthy benchmarks entails regulatory supervision and conformity to particular standards delineated in the European Benchmarks Regulation (BMR). The National Competent Authority (NCA) in charge of regulating the actions of an EU administrator has the power to declare a benchmark as important when it is submitted by the administrator. Based on a predetermined set of qualitative standards outlined in the BMR, this classification has been made.
The European Securities and Markets Authority (ESMA) is in charge of designating benchmarks supplied by third-country administrators. When one or more NCAs request it, ESMA assesses the benchmark's relevance by comparing it to the BMR's specified standards. This procedure guarantees transparency and uniformity in benchmark identification throughout the financial system of the European Union.
The purpose of the regulatory framework is to maintain the integrity and dependability of benchmarks used inside the EU by giving NCAs and ESMA the designation authority. The BMR's qualitative standards are strictly adhered to, guaranteeing that only benchmarks with substantial market significance are designated, hence promoting the stability and effectiveness of financial markets.
Regulatory Oversight: Warning Notes for Benchmark Usage
The European Commission suggests giving the European Securities and Markets Authority (ESMA) and National Competent Authorities (NCAs) the power to issue warning warnings about major benchmark compliance. These public notices, which serve as warning notices, draw attention to cases in which benchmark administrators disregard relevant regulatory standards. The objective of this effort is to improve regulatory compliance and transparency in the use of benchmarks within the financial landscape of the European Union.
- Competency to Issue Warnings: When the administrator of a significant benchmark disregards relevant regulations, especially those pertaining to authorization, registration, endorsement, or recognition, the Commission suggests giving NCAs and ESMA the power to publicly issue warning notices.
- Effect on Supervised Entities: Supervised entities are not allowed to add new references to the benchmark or combination of benchmarks in question after receiving a warning notice. The purpose of this approach is to reduce the dangers that come with benchmarks that don't adhere to legal requirements.
- Verification Requirement: Supervised entities must check the European Single Access Point or the ESMA register to confirm that benchmark administrators are in compliance with regulations before using significant benchmarks, EU Climate Transition Benchmarks, or EU Paris-Aligned Benchmarks. Entities are guaranteed to only interact with benchmarks that adhere to regulatory compliance norms according to this verification process.
Within the European financial ecosystem, the Commission hopes to fortify regulatory control and foster trust in benchmark usage by instituting warning alerts and improving verification procedures.
Changes for Third-Country Benchmark Administrators
Significant modifications to the Benchmarks Regulation's (BMR) acceptance of third-country benchmark administrators are being proposed by the European Commission. The Commission offers a more long-term answer by recommending switching from the existing equivalency regime to a recognition regime that necessitates third-country administrators to get an EU license. Furthermore, within two years of the amended BMR's implementation, the Commission suggests less onerous application procedures for administrators seeking additional authorizations, registrations, endorsements, or recognitions. The objectives of these suggestions are to improve market efficiency, simplify regulatory procedures, and give benchmark administrators functioning in the European financial system clarity and stability.
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