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A glimpse of the 2015 EU benchmark regulation

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) published its draft report on the proposed benchmark regulation, dated 11 December 2014.

The report contains 247 amendments to the proposal[1], illustrating the large amount of work that still needs to be done in 2015 before the regulation is adopted. ECON shows progress on the key contentious issues, including the third-country regime, critical benchmarks and proportionality.

The amendments to the third-country regime would result in a more workable regime, as a number of mechanisms permit the use of foreign benchmarks in the EU. This issue was largely alleviated already, as most of the amendments were incorporated in the latest proposals.

Benchmarks used as a reference for financial instruments and financial contracts with an average value of at least EUR 500 billion would be deemed critical. In addition, competent authorities would have discretion to designate critical benchmarks based on the adverse impact within their jurisdiction in the event of the cessation of a benchmark. As such designation may have consequences on other Member States, the crux of the problem is to set up acceptable checks and balances involving other Member States and ESMA. This significant issue remains to be resolved.

The most significant contribution of the draft report is without doubt the concept of noncritical benchmark: “a benchmark which does not meet the criteria for a critical benchmark”.  A noncritical benchmark administrator would be subject to feather-light regulation. It would be required to register with the competent authority, but it is specified that “registration of an administrator is not intended to affect supervision”.

Instead, the administrator would be required to publish and maintain a “compliance statement” to report on its compliance with the requirements set out in the regulation.  Such statement would be verified by an independent auditor. For most of the requirements, it would be sufficient to “comply or explain”, as it is substantially the case for IOSCO principles at the moment.

Once again, the line is blurred between regulation and non-binding principles. Nonetheless, the nature of these amendments will please the benchmark administrators, so they can live to fight another day. Indeed, the draft report recognises that “imposing extensive binding requirements on noncritical indices, would risk creating unnecessary, substantial costs”.

Supervised entities were not as lucky. ECON would maintain the requirement to anticipate the cessation of a benchmark, identify alternative benchmarks and “where possible” reflect them in the contractual relationship.  The key challenge for 2015 may be to define “where possible”.

[1] The draft report is based on the original proposal dated 18 September 2013. A number of Presidency compromise proposals were circulated since, reflecting some of the amendments indicated in the report.

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