On 4 December 2015, the final compromise text of the EU benchmark regulation was released.

The text already received approval from the Council and the European Parliament on 24 November 2015, and from the Permanent Representatives Committee (COREPER) on 9 December 2015. The next step is to submit the regulation to the European Parliament for a vote at first reading in the beginning of 2016.

The press release of the Council lays out the broad lines of the upcoming regime applicable to benchmarks used by supervised entities in the European Union.

In response to repeated demands, the near-final regulation contains more realistic approaches to proportionality and non-EU benchmark administrators.

EU and non-EU administrators will face new burdens. The former will have to submit applications for registration or authorisation, while the latter will have to submit applications for equivalence, recognition or endorsement. All administrators will need to publish benchmark statements, while all except critical benchmarks would have to publish compliance statements in order to benefit from lighter requirements.

Amongst the three regimes for non-EU administrators: equivalence, recognition and endorsement, most non-EU administrators are likely to venture onto the path of recognition as it appears to be the most accessible. Even then, the services of a legal representative based in the EU will be required. Much more than a straw man, the representative will have to take part in the oversight function and shall be accountable to the competent authority in the EU.

Proportionality  

In accordance with the principle of proportionality, the regulation divides benchmarks into three categories essentially tied to their total level of use, including as a reference for financial instruments or financial contracts, or for the determination of the performance of investments funds:

• Critical benchmarks: a total value of at least €500bn, or at least €400bn and the benchmark has no or very few appropriate market-led substitutes and its absence would have significant and adverse impact
• Significant benchmarks: total value of at least €50bn, or the benchmark has no or very few appropriate market-led substitutes and its absence would have significant and adverse impact
• Non-significant benchmarks

In the name of transparency, lighter requirements do not automatically apply to minor benchmarks.

(Non) Compliance Statement   

The administrators of Significant benchmarks and Non-significant benchmarks may choose not to apply certain articles[1], provided a compliance statement is published to clearly state why it is appropriate not to comply. ESMA will develop a template via implementing technical standards.

Significant benchmarks have access to a shorter list of exemptions: only a third of the exemptions available to Non-significant benchmarks are available to the administrators of Significant benchmarks. Furthermore, the national competent authority might overturn the decision of the administrator and nevertheless require full compliance.

The compliance statement is required in addition to the benchmark statement, as the latter serves a different purpose. Also published by the administrator, the benchmark statement provides detailed information on the benchmark, such as the market or economic reality being measured.

Non-EU benchmarks

The original proposal provided only one way for non-EU benchmarks to continue to be used in the EU: equivalence. The key condition was for the Commission to adopt a decision confirming the equivalence of the legal framework and supervisory practice of the relevant third country.

A number of alternatives were introduced over the various versions of the draft regulation as it became clear that no other jurisdiction intended to develop extensive regulatory regimes covering benchmarks.

At best, certain jurisdictions[2] decided to adopt legislation covering a small number of significant benchmarks. The EU regulation now recognises that reality and specifies that equivalence decisions might be made for such regimes with a more limited scope.

In addition, a recognition regime and an endorsement regime were introduced, with a few last minute adjustments added to the latest version in order to greatly assist non-EU benchmarks in keeping a toehold in the EU.

Recognition

The recognition regime requires an application to the Member State of reference, essentially determined by the importance of the link between a benchmark and a Member State.

The administrator must comply with the requirements in the regulation. This may be fulfilled by compliance with either the IOSCO principles for Financial Benchmarks of the IOSCO principles for Oil Price Reporting Agencies as applicable. Compliance with certain specific provisions[3] is not imposed.

The competent authority may rely on the assessment by an independent external auditor, or on a certification provided by the national competent authority if the administrator is subject to supervision. In contrast with previous versions, it would not be mandatory for the third country benchmark administrator to provide an assessment by an independent external auditor.

The obligation for the administrator to designate a legal representative in the Union remains similar to previous versions. However, the need for an appropriate cooperation arrangement to be entered into between the Member State of reference and the third country authority of an administrator would now arise only “where the administrator located in a third country is subject to supervision”.

This nuance is important, as previous versions assumed that administrators located in a third country were supervised by a regulator. Such a condition appeared problematic when it was not the case.

Endorsement

An administrator registered or authorised in the EU may endorse a non-EU benchmark and file an application with its competent authority. New to the latest version of the regulation, any supervised entity could now endorse a non-EU benchmark, provided it has a clear and defined role within the control or accountability framework of the third country administrator.

The administrator must fulfil requirements as stringent as the requirements from the regulation. The national competent authority may take into account compliance with the IOSCO principles for Financial Benchmarks of the IOSCO principles for Oil Price Reporting Agencies as applicable.

As a condition to the use of the endorsement regime, the administrator will be required to provide an objective reason to provide the benchmark in a third country and endorse them for use in the Union. Delegated acts will bring clarification on this original condition, which appears as a counterweight to the wide possibility of endorsement by any supervised entity.

Timeline

The regulation is expected to apply 18 months after its publication in the Official Journal. Within 24 months after that date, EU administrators providing a benchmark on the date of entry into force of the regulation will have to submit their application, as permitted by the transitional provisions.

Similar transitional provisions do not exist for non-EU benchmarks, which puts non-EU administrators under a much tighter timeframe.

[1] Significant benchmarks: Articles 5(2), 5(3c)(c)(d)(e), 7(3a)(b) and 9(2)

Non-significant benchmarks: Articles 5(2), 5(3c)(c)(d)(e), 5(3d), 5a(2), 5a(3), 5a(4), 5b(1), 5b(2a), 5b(4), 5c(2), 7(1)(aa), 7(2a)(b)(c), 7(3a), 7b(2), 8(2), 9(2), 11(2) and 11(2b)

[2] E.g. see Singapore’s benchmark Sling diluted

[3] Article 7(4), which provides that an administrator might have to change the input data, the contributors or the methodology in order to accurately represent the market or the economic reality

Article 11 Governance and control requirements for supervised contributors

Article 13 Critical benchmarks

Article 13(a) Mandatory administration of a critical benchmark

Article 14 Mandatory contribution to a critical benchmark

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