European Benchmarks Regulation

Regulation (EU) 2016/1011 of June 8th 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds(the “Benchmarks Regulation”), entered into force on June 30th 2016 and will apply from January 1st 2018.

The Benchmarks Regulation was introduced as a response to several cases of benchmark manipulation. Citing conflicts of interest as one of the main causes of benchmark manipulation, the European legislator has set up, with the Benchmarks Regulation, a preventive regulatory regime to combat such manipulation.

The scope of the Benchmarks Regulation is broad.

It applies to indices, i.e. published figures regularly determined by the application of a calculation method, or an assessment, on the basis of underlying values, such as assets, prices, quotes or surveys, to the extent that they are used to (1) determine amounts or values of financial contracts/instruments or (2) measure the performance of an investment fund.

The Benchmarks Regulation subjects “administrators” (entities providing benchmarks) and “contributors” (entities contributing input data for benchmarks), to governance and conflicts of interest requirements, among other rules. Moreover, the calculation of benchmarks must satisfy a stringent set of requirements related to input data and methodology. Supervised entities (including credit institutions, investment firms and UCITS) can only use benchmarks provided by administrators located in the European Union or, subject to certain conditions being fulfilled, benchmarks provided by an administrator in a third country. ESMA will maintain a register of administrators and benchmarks.

In order to tailor the rules according to the degree of risk of benchmark manipulation, the Benchmarks Regulation distinguishes between types of benchmarks to which different rules apply. One distinction is by type (e.g. interest rate). Another distinction is by market usage. The Benchmarks Regulation designates “critical” benchmarks (determined by the European Commission), significant benchmarks (at least 50 billion in value) and non-significant benchmarks. Benchmarks deemed to be critical will be subject to stricter rules, including the power for the relevant competent authority to mandate contributions of input data. Pursuant to the Benchmarks Regulation, the European Commission has adopted Commission Implementing Regulation (EU) 2016/1368 of August 11th 2016 establishing a list of critical benchmarks used in financial markets. Currently only the Euro Interbank Offered Rate (EURIBOR) is listed as a critical benchmark.

In conformity with national law, the Benchmarks Regulation endows competent authorities with powers to intervene in case of infringement of the rules, such as by freezing assets and temporary cessation of practices contrary to the Benchmarks Regulation. Member States are required to empower competent authorities to impose administrative sanctions.

ESMA is requested to develop various draft regulatory technical standards and implementing technical standards under the Benchmarks Regulation by April 2017.

To summarise: the Benchmark Regulation introduces a comprehensive regime for the provision and use of benchmarks which a significant number of credit institutions and investment firms must soon comply with.