What does the
European Securities and Markets Authority (ESMA)
regulate in the newest Guidelines on benchmarks? When is a benchmark not
significant? The following article will answer these questions and more.
The regulation of benchmarks
Since January 2018, the administration, provision and use of benchmarks has been regulated by the Regulation (EU) 2016/1011 on indices used as benchmark in financial instruments and financial contracts or to measure the performance of investment funds (BMR). The BMR introduces a regime for benchmark administrators, contributors and users that ensures the accuracy and integrity of benchmarks so that they are robust, reliable, representative and suitable for the intended use by establishing rules for administrators, contributors and users of critical, significant and non-significant benchmarks. We already shared this blog post on November 22, 2018 on emergency plans, which are also part of the BMR´s regulatory regime.
ESMA Guidelines on non-significant benchmarks
On December 20, 2018, ESMA published its Final Report on the Guidelines for non-significant benchmarks (NSB) (available here), which refers to the provisions in Article 5, 11, 13 and 16 BMR. This was preceded by the consultation of the Guidelines in September 2017. The Guidelines serve to concretise the provisions of Article 5, 11, 13 and 16 BMR and provide more detailed input on how the BMR’s provisions are to be implemented, thus ultimately present ESMA’s supervisory practice.
NSB are benchmarks that are neither critical nor significant. A benchmark is considered critical if it serves as a reference basis for financial instruments or contracts with a total value of at least €500 billion. A benchmark is also critical if its sudden disappearance could have considerable negative effects on the stability of the markets. Significant benchmarks are those that are used as a reference basis for financial instruments or contracts with a total value of at least €50 billion. For critical and significant benchmarks, ESMA published Draft technical standards (RTS) under the Benchmark Regulation on March 30, 2017. They were published in the Official Journal of the European Union on November 5, 2018 . Since the RTS are issued as a regulation, they apply directly in the EU member states. However, for non-significant benchmarks, ESMA is mandated to prepare Guidelines which are not directly binding in the EU member states, but are generally adopted one-to-one by the respective national supervisory authority, thus they become part of its administrative practice. If the guidelines were not to be adopted, the national supervisory authorities must announce this publicly.
The Guidelines on non-significant benchmarks set out details for four areas of the BMR: the oversight function (article 5 BMR); input data (Article 11 BMR); the transparency of methodology (Article 13 BMR); and the requirements for the governance of supervised contributors (Article 16 BMR). As a result, the broad rules of the BMR are filled in with more details that make their implementation considerably easier for the obligated parties.
In Part 1, we will look at the Guidelines on the oversight function and on input data. Part 2 will highlight the Guidelines on the transparency of methodology and the governance requirements.
Guidelines on procedures and characteristics of
the oversight function (Article 5 BMR)
Article 5 BMR sets
out the oversight requirements that each administrator must maintain to ensure
that all aspects of the provision of its benchmarks are monitored. The Guidelines
on Article 5 BMR contain different sections on the composition of the oversight
function, on its internal positioning and on procedures that should govern the
oversight function, as well as a non-exhaustive list of governance
For example, the Guidelines require that the oversight function should be composed of one or more members who together have the skills and expertise appropriate to the oversight of the provision of a particular benchmark and to the responsibilities the oversight function is required to fulfill. Administrators should also consider including, as members of the oversight function, representatives from trading venues. To ensure that no conflicts of interests intervene, persons directly involved in the provision of the NSB that may be members of the oversight function should have no voting-rights. Representatives of the management body should not be members or observers of the oversight function but may be invited to attend meetings by the oversight function in a non-voting capacity.
The oversight function should constitute a part of the organisational structure of the administrator, but needs to be established separately from the management body and other governance functions. Additionally, the oversight function should have its own procedures, for example, in relation to the criteria for member selection, the election, nomination and replacement of its members and access to the documentation necessary to carry out its duties.
Guidelines on input data (Article 11 BMR)
Article 11 BMR
regulates the requirements for input data provided for the determination of the
benchmark. Input data is the data used to determine the benchmark and relates
to the value of an underlying asset. This may include, for example, real time transaction
data of the respective underlying asset.
contain two sections on ensuring appropriate and verifiable input data and the
internal oversight and verifications procedures of a contributor to a NSB.
In order to ensure
that the input data used for a benchmark is appropriate and verifiable, the
administrator should have available all information necessary to check whether
the submitter is authorised to contribute the input data on behalf of the
contributor in accordance with Article 25 of BMR, whether the input data is
provided by the contributor within the time-period prescribed by the
administrator and whether the input data meets the requirements set out in the
methodology of the benchmark.
The internal oversight and verification procedures of a contributor that the administrator of a NSB ensures should include procedures governing, inter alia, requested communication of information to the administrator and three levels of control functions. The first level of control should be responsible for, inter alia, the effective checking of input data prior to its contribution and the submitter´s authorisations to submit input data on behalf of the contributor. The second level of control should be responsible for establishing and maintaining whistle-blowing procedures and internal reporting of any attempt or actual manipulation of input data. The third level of control should be responsible for performing checks on the controls exercised by the other two control functions. Therefore it must be independent from the first and second control level.
Applicability of the Guidelines
As NSB have less
impact on markets than critical or significant benchmarks, Article 26 BMR
provides for numerous simplifications for administrators with regard to NSB. Administrators
may decide not to apply some of the provisions of Article 4 to 7, 11, and 13 to
15 BMR. However, an incentive to apply the regulations may be, for example,
that the administrator does not have to maintain different internal structures and
processes for its benchmarks. It is not necessary to constantly check whether
the NSB exceeds the threshold that makes it a significant benchmark if the
requirements of a significant benchmark are consistently met.
Since some of the Guidelines concern regulations whose applicability the administrator can exclude according to Article 26 BMR, the Guidelines do not apply if the administrator has decided in a permissible manner not to apply the corresponding regulations. However, if the Guidelines concern regulations from which the administrator may not deviate or if he has decided not to make use of the simplifications in Article 26 BMR, the Guidelines shall apply.