The introduction of the BMR or Benchmarks Regulation across the Europe Union is set to come into force at the start of 2018, with potentially wide-ranging consequences for the buy-side firms that fall under its purview. And, as Rimes Technologies explains, complying with its various provisions is anything but a trivial undertaking.
The European Union is due to start enforcing its Benchmarks Regulation (BMR) from January 1, 2018 in order to regulate the provision of, contribution to, and use of a wide set of benchmarks.
The BMR was created to:
- Manage conflicts of interest inherent to certain investment processes
- Prevent supervised entities (including asset managers, asset owners and insurance companies) from using unregulated benchmarks in the EU
- Improve governance and controls around the benchmarks process.
With the date of implementation approaching, let’s take a look at the regulation and what you need to know in order to comply with its various rules.
The BMR imposes new requirements on firms that provide, contribute to, or use a wide range of interest rate, currency, securities, commodity and other indices and reference prices. The BMR defines an index as a figure that is publicly available and is regularly determined, either by applying a formula or other calculation or making an assessment on the basis of the value of one or more underlying assets/prices (including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys).
An index becomes a benchmark within the scope of the BMR 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 portfolio, or computing performance fees.
Firms become benchmark administrators if they provide indices that are used in:
- Financial instruments traded on trading venues or via systematic internalizers within the EU
- Mortgage or consumer credit contracts or investment funds.
Firms might become benchmark contributors under the Regulation if they:
- Contribute input data that is not readily available to the administrator, and provide the input data for the purpose of a benchmark determination
Firms might become a benchmark user and be subject to additional requirements if they are supervised under Mifid II, the Capital Requirements Directive, Ucits or one of the other EU regulations as specified in Article 3(1)(17) and you:
- Issue a financial instrument that references an index
- Determine the amount payable under a financial instrument or a mortgage or consumer credit contract by referencing an index
- Are 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.
Authorities can impose financial and/or non-financial penalties for Financial Benchmarks Regulation infringement, including issuing cease and desist orders, up to a €500,000 fine for individuals deemed to have breached requirements, or €1 million or 10% of annual income for companies that have breached requirements.
Under BMR, firms that use benchmarks must:
- Ensure the supplier of their benchmark is a registered administrator under BMR
- Ensure the benchmark is administrated by an official administrator based in the EU
- Ensure they have robust plans in place to substitute a benchmark in the case of material change to or cancellation of a benchmark.
To take the BMR test and to see how ready you are go to: