The new EU Benchmark Regulation is looming large both in and outside of the EU, with some non-EU administrators having already withdrawn their benchmarks from the EU market.
Under the new regime, while some transitional provisions will apply to benchmarks already in use, there are three ways for a non-EU benchmark to be accepted by EU regulators to be used by an EU-supervised entity: equivalence, recognition and endorsement. All these concepts require either EU bodies or national regulators recognise the non-EU benchmark as being regulated to a standard equivalent to the new regime.
The new regime will take effect on January 1 2017, and Euribor is the first critical benchmark designated by the EU Commission. The Financial Conduct Authority has in recent years been regulating Libor and, among other things, requires banks to comply with the International Organization of Securities Commissions (Iosco) principles.
But while the full impact of the regulation remains to be seen, there is already uncertainty over how many non-EU administrators will seek to qualify their benchmarks under the third country regime. They are worried about the potential knock-on effect on the range of hedging and investment products in the EU as a result of non-EU administrators deciding not to comply with the new regime.
- The new EU benchmarks regulation will come into effect on in
January next year, with Euribor being the first critical benchmark designated
by the EU Commission;
- There are three ways for a non-EU benchmark to be accepted
by EU regulators to be used by an EU-supervised entity: equivalence,
recognition and endorsement;
- The EU Benchmark Regulation goes beyond the International
Organization of Securities Commissions (Iosco) principles, which take the
definition of a benchmark that is much wider than the UK’s current specified
Libor plus seven other benchmarks;
- London-based counsel currently advising non-EU clients on
the new regulation have told IFLR that there is generally not yet sufficient
understanding among non-EU entities and jurisdictions, including those in Asia,
of the regime’s extraterritorial impact and its effect on their benchmark
currently in use in Europe.
“We are already starting to see some benchmark administrators discontinuing certain benchmarks or imposing restrictions on their use,” said Caroline Dawson of Clifford Chance in London. She added that this trend is likely to continue if non-EU administrators cannot be assured that their benchmarks can continue to be available for use in the EU.
But, as Mark Compton, partner at Mayer Brown in London points out, like the UK, Japan and Singapore currently regulate certain critical benchmarks – but these are not necessarily equivalent to the level which the regulators in the EU would recognise.
“Nobody, at one very basic level, regulates any benchmark to that equivalent level because there is no legislation that regulates benchmarks in that way,” said Compton.
The new regulation, in some respects, goes beyond the Iosco principles, which define a benchmark in a much wider way than the UK’s current specified Libor plus seven other benchmarks. This means that, while Singapore and Japan could argue that they comply with Iosco principles, they are technically not as they are only regulating certain specific benchmarks with the EU regulators likely requiring something on top of that.
Compton argues that not only will it be challenging for non-EU benchmarks to establish such equivalence going forward, but they will also encounter difficulty satisfying any of the three avenues of acceptance. Beyond that, the recognition and endorsement process require an EU entity to submit to EU regulators for aspects of the non-EU benchmark’s activities, which could be difficult to arrange.
“Each of the avenues has its own drawbacks on top of the fact that you will find it difficult to show that the regime under which you are regulated is equivalent,” warned Compton. He pointed to the absence of a formal process for assessing equivalence, while contending that the avenues are politically driven.
London-based counsel currently advising non-EU clients on the new regulation have told IFLR that there is generally not yet sufficient understanding among non-EU entities and jurisdictions, including those in Asia, of the regime’s extraterritorial impact and its effect on their benchmark currently in use in Europe.
"We are already starting to see some benchmark administrators discontinuing certain benchmarks or imposing restrictions on their use"
On the point of equivalence, Dawson disagrees that non-EU states’ limited category of regulated critical benchmarks is a definite barrier to obtaining equivalence. The Commission may adopt an equivalence decision either where a non-EU jurisdiction imposes EU benchmark-equivalent requirements, or if a specific non-EU administrator or benchmark is subject to Iosco-compliant binding requirements.
Dawson points to a lack of clarity over a number of areas including how the Commission or EU regulators will judge whether or not local requirements are equivalent to those of the regulation. The regime indicates that they can take into account whether the local regulatory framework ensures compliance with the Iosco principles, but it is not clear in all cases how a benchmark administrator will be required to demonstrate compliance with those standards. Also, the provisions on recognition state that the EU regulator may rely on an auditor's or supervisor's certificate of compliance with Iosco but, as Dawson argues, even if a non-EU administrator can provide this, it is not clear whether additional obligations, such as periodic updates, may apply.
She points to a big question mark over whether EU regulators will take the approach that compliance with Iosco principles is achieved, provided the non-EU administrator is subject to supervision and enforcement for breach; or if they will be looking for compliance with a regime that more closely tracks the new regulation. In addition it will be difficult for non-EU administrators who currently comply with Iosco principles on a voluntary basis to qualify under the third country regime unless they go to their regulator and ask for benchmark regulations to be imposed.
“It is also unclear whether non-EU administrators may also have to provide additional information to satisfy the Commission or EU regulators for compliance purposes, and what that information might be,” said Dawson.
But Compton has observed some encouraging trends with Singapore and Japan having grasped the issue in relation to critical benchmarks. Larger institutions with an Asian connection, which is not confined to Asian banks with representation in the EU but UK banks with a big Asian presence, are gearing themselves up for the new regime.
market access: special report
II’s extraterritorial reach worries Asian market