BMR continues to develop its impact in the different industry sectors that rely on benchmarks, e.g., derivatives, capital markets, banking, etc., as well domestic regulations. In this article, we do not look at a particular instrument or finance industry but strictly at recent regulatory changes in the United Kingdom. Although the changes are not major and do not impact the trading or negotiation of derivatives or loan facilities, it is important to monitor them and track where we are in terms of BMR implantation. This article briefly highlights the main points.
Background
The Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 (the "BMR")1, which came into force on 30 June 2016 (although most of the provisions came into force on 1 January 2018) and its main aim is to lay down a regulatory framework for benchmarks at the European Union ("EU").2 The use of a regulation was deliberate, so it will ensure that provisions directly imposing obligations on persons involved in the provision, contribution and use of benchmarks are applied in a uniform manner throughout the EU.
In spite of the fact of BMR being a regulation and therefore having a direct effect, the Financial Conduct Authority ("FCA") had to change its Handbook to ensure consistency with the BMR. The main purpose of these changes involves removing domestic rules that are superseded by the BMR, though the FCA advised that they will continue to apply to the administrators of, and submitters to, those benchmarks the FCA already regulates, until their administrators become authorised or registered under the BMR. The FCA proposes to maintain some domestic rules on benchmark administrators in areas not covered by the BMR. This process has involved a two-fold consultation process on the proposed changes, Consultation Paper CP17/173 and Consultation Paper CP18/54.
These changes are not required in other EU Member States as the United Kingdom is one of the few Member States that already has a system of regulating benchmarks. It was introduced by amendments to the Financial Services and Markets Act 2000 ("FSMA"), originally applying only to LIBOR in 2013, and has since been extended to seven more benchmarks. Currently, the FCA supervises eight "specified benchmarks", while the BMR applies much more widely, including all indices that are used in the EU as the basis for financial instruments or certain financial contracts, or that are referenced by an investment fund. As a consequence, many firms that are not currently supervised by the FCA will need to apply to the FCA for authorisation or registration under the BMR.
The BMR is directly applicable and will supersede most of the Handbook rules that deal specifically with benchmark administration and contribution. In particular, much of the benchmarks section of the Market Conduct sourcebook (MAR 8) will be deleted or amended. These changes will take effect on 1 January 2018. Generally, these changes give additional powers to the FCA over authorised persons that breach the BMR. More importantly, it provides for an specific registration and authorisation procedure of EU benchmark administrators.
On 29 June, the FCA published the Benchmarks Regulation (Amendment) Instrument 20185 (the "BMR Instrument"), which implements the proposed changes discussed in both consultation papers. Most of the BMR Instrument came into force on 29 June 2018, other than Annex J, which came into force on 1 July 2018.
New Regulated Activity
Administering a benchmark will be now a regulated activity and essentially will involve acting as the administrator of a benchmark as defined in article 3.1(3) of BMR.6 The new benchmark activities include: (a) the regulated activity of administering a benchmark or (b) contributing input data to a BMR benchmark administrator. However, it is important to highlight that neither acting as a benchmark contributor nor contributing input data is a regulated activity. A benchmark contributor will include both a third country7 benchmark contributor and a UK benchmark contributor.
The FCA has clarified that the activity of administering a regulated benchmark will always be regarded as being conducted as "by way of business" and that a firm must apply under the BMR according to where it is located, that is, where its registered office is8.
Third-Country Benchmark Contributor
A third country benchmark is defined as a firm which: (a) contributes input data to a BMR benchmark administrator; (b) is located in a non-EU state; and (c) either is a supervised entity or would be a supervised entity if it were located in the EU.
This follows the same approach that has been adopted with other regulatory frameworks, mainly EMIR.
Publication of FCA Decisions
Article 34 of the BMR requires the administrator of a benchmark to be authorised or registered. The BMR Instrument makes no distinction between authorisation or registration, so firms already subject to supervision under an EU piece of legislation will apply for registration. On the contrary, firms not subject to supervision should apply for authorisation. Therefore, an important aspect for users of benchmarks is to ensure the relevant administrators are duly authorised or registered. During the consultation papers, it became clear that a main concern for users was to know well in advance whether a request for authorisation or registration had been refused. Although refusals for endorsement and recognition have different consequences, the same approach will be followed.
1 Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1011&from=EN
2 Please see our previous Delta Report on the BMR. Available at: https://www.whitecase.com/publications/article/end-libor-preliminary-reflections-its-implications-derivatives
3 Available at: https://www.fca.org.uk/publication/consultation/cp17-17.pdf
4 Available at: https://www.fca.org.uk/publication/consultation/cp18-05.pdf
5 Available at: https://www.handbook.fca.org.uk/instrument/2018/FCA_2018_29.pdf
6 Article 63S of the Regulated Activities Order.
7 The BMR contemplates three ways by which benchmark issued by non-EU administrators may be approved for use in the EU: equivalence (Article 30 BMR); recognition (Article 32 BMR) and endorsement (Art 33 BMR).
8 Handbook Notice No 56, June 2018. Available at: https://www.fca.org.uk/publication/handbook/handbook-notice-56.pdf
THE DELTA REPORT
Derivatives Newsletter
March 2019
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