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In July, the UK's Financial Conduct Authority (FCA) finalised changes to its Handbook that brought it into line with the EU Benchmarks Regulation (BMR).
Described as the regulation "on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds", BMR came into force on 30 June 2016, with most of its provisions taking effect on 1 January 2018. Its aim is to introduce a common framework and consistent approach to benchmark regulation across the EU.
While the FCA changes are not significant and do not affect the trading or negotiation of derivatives or loan facilities, it is important to monitor them and track where we are in terms of BMR implementation.
The changes remove domestic rules that are superseded by the BMR, though the FCA advised that they will continue to apply to entities which administrate or submit to benchmarks already regulated by the FCA until they are 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 involved a two-fold consultation process on the proposed changes, Consultation Paper CP17/17 and Consultation Paper CP18/5.
These changes are not required in other EU Member States since the UK is one of the few Member States that already has a system of regulating benchmarks. The system was introduced in the UK by amendments to the Financial Services and Markets Act 2000 (FSMA), originally applying only to LIBOR in 2013, but has since been extended to a further seven 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, which took effect on 1 January 2018, give additional powers to the FCA over authorised persons that breach the BMR. More importantly, it provides for a specific registration and authorisation procedure of EU benchmark administrators.
On 29 June, the FCA published the Benchmarks Regulation (Amendment) Instrument 2018 (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.
As a result, administering a benchmark has become a regulated activity and essentially will involve acting as the administrator of a benchmark as defined in article 3.1(3) of BMR. 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 its registered office is located.
New benchmark activities include either (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-country benchmark contributor and a UK 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) is either 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.
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. Firms already subject to supervision under EU 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 authorised or registered. During the consultation it became clear that a big concern for users was to know well in advance if a request for authorisation or registration had been refused. Although refusals for endorsement and recognition have different consequences, the same approach will be followed.
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