Endorsement of foreign benchmark? Bonne chance
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On 27 May 2016, ESMA published a Consultation Paper on draft technical advice under the Benchmarks Regulation, with the objective of submitting the final report to the Commission in October 2016.
The consultation is a follow-up to the Discussion Paper which covered both the technical advice and the technical standards. The consultation phase is divided in two, as technical advice is due earlier than the technical standards, respectively 4 and 12 months after entry into force of the regulation.
A separate consultation on the technical standards is expected mid-2016.
ESMA’s draft technical advice covers:
- Some core elements of the definitions helping identify a regulated benchmark, the provision of a benchmark and its use, i.e. “making available to the public”, “administering the arrangements for determining a benchmark” and “issuance of a financial instrument”
- Measure of the reference value of a benchmark, covering both direct and indirect reference
- Endorsement of third country benchmark, in particular the nature of “objective reasons” to provide a benchmark in a third country and endorse the use in the Union
- Recognition of a benchmark as critical
- Transitional provisions to temporarily permit the use of an unauthorised benchmark
The regulation has been criticised in the past for acting as a barrier to entry against non-EU benchmarks. Earlier versions contained only an equivalence mechanism; to be allowed in the EU, foreign benchmarks had to be subject to an equivalent regulatory regime in their home country. This proved problematic, as no other jurisdiction seemed prepared to regulate benchmarks as extensively as the EU. Two alternative mechanisms were introduced to facilitate access to foreign benchmarks:
The endorsement mechanism allows an EU administrator or other supervised entity to endorse a third country benchmark for use in the Union, subject to the condition that there are objective reasons to provide the benchmark or family of benchmarks in a third country and for said benchmark or family of benchmarks to be endorsed for their use in the Union.
The technical advice set out stringent requirements around “objective reasons” to justify the endorsement, effectively turning the promised highway into a cul-de-sac: “an administrator should represent that not only it is at least overly burdensome to produce the existing benchmark within the Union but, additionally, that although the benchmark is so specific and so closely related to a third country region it is nonetheless appropriate to consider it being provided by an administrator or other supervised entity in the Union”.
Recognition might prove to be the better option, the final details of which will be known in the upcoming consultation on technical standards.
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