'Not even Mother Teresa wouldn’t manipulate
Libor if she was setting it and trading it’
The EU Benchmarks Regulation (BMR) is the first of its kind
in the world – and it’s causing a lot of
The London Inter-bank Offered Rate (Libor)-rigging scandal,
which saw traders collude over a number of years to manipulate
financial benchmarks in their favour, severely damaged public
perceptions of the financial industry.
The scandal is a strange one in that there were –
as those implicated argue – no clearly identifiable
victims. The mortgage payments of buy-to-let investors, private
bank clients and subprime borrowers may have been adversely
affected, but conversely others will have benefited.
Regulators feel very strongly that this argument misses the
point, and that without standards, processes and procedures
governing benchmarks, such misconduct will continue to fester.
Enter the BMR.
How did it come about?
Markets have everyone’s favourite Financial
Conduct Authority (FCA) chief executive to thank for the BMR:
The infamous/famous Wheatley Review of 2012 recommended that
Libor be reformed, and that regulators introduce criminal
sanctions for benchmark manipulation.
That proposed reform suggested shifting administration of
the rate from the now-defunct British Bankers’
Association to a new unknown administrator, improvements to the
calculation methodology, and enshrining administration and
submissions in the Financial Services and Markets Act 2000 as
agreeing to rig a rate in exchange for a curry is clearly a
governance issue, regulators felt that there were systems and
control issues too. Benchmarks themselves – Libor in
particular – needed reforming just as much as the
people in charge of them.
The feeling is that the Senior Managers & Certification
Regime, which aims to improve culture in financial services
– a notoriously difficult thing to regulate, did not
go far enough when it comes to benchmarks.
How does it work?
Technically, the BMR places the burden of compliance on the
users of benchmarks rather than their providers. Once
it’s fully implemented, EU-based benchmark
providers will only be able to use financial benchmarks that
have received prior authorisation from the European Securities
and Markets Authority (Esma). If they can’t find
the provider on the approved
register, they can’t use the rate.
But 'technically’ is the operative word there.
Most financial benchmark providers make money out of others
(mostly asset managers) using their benchmarks – so
the burden is, arguably, still on the provider.
As for what’s actually required, sources say
it’s not too rigorous: internal oversight,
controls and accountability frameworks and the regulation of
methodologies and input data.
"The BMR makes it formal, but it’s all about a
standard of care which is very reasonable," says Adam
Schneider, partner at Oliver Wyman. "If benchmark
administrators are operating in EU markets it’s
very much in their interest to get authorised – and I
hope those working in indexes understand that."
The initial scoping exercise was significant, too: firms at
the larger end of the scale can have 500 or more prop indices
in operation. And because it’s such a complex
area, the number of people in that organisation who fully
understand the index is likely to be limited, potentially even
to just the desk that operates it.
Next up was establishing exactly who was using the indices,
where they were, and what they used it for. According to
sources, many fell at the first hurdle.
Late last year consultants were still receiving questions on
how to establish benchmark users.
What about non-EU benchmark
While most major providers see benchmarks as a core tenet of
their business – or a revenue-generating element, at
least – some do not.
"There’s an enormous number of people who
haven’t realised they’re
administrators yet, particularly on the buyside," a market
participant close to the Libor reform process
told IFLR’s sister publication Practice Insight
late last year. "The moment you customise someone
else’s indices, you are an
administrator…there’s an awful lot of
people on the buyside who don’t seem to understand
The BMR outlines three potential routes for third country
providers: endorsement, recognition, and equivalence.
First, equivalence, which is a relatively well-understood
regulatory concept, and is being pursued by lawmakers in
Australia and Singapore.
Both remaining routes require a significant level of
expertise and experience – and risk appetite. While
recognition is considered a stepping stone to equivalence,
endorsement is more far-reaching and significantly riskier for
Given that indices on the whole is a relatively new
industry, it’s not clear how many people even
exist in the EU with that level of understanding.
"As an endorser you take on the entirety of the legal risk
for that benchmark, and I’m not sure
there’s many willing to do that," says a director
at a firm considering providing these services.
And it can be significant risk. Another source at a large
benchmark administrator said that understanding of what
constitutes indices manipulation is still severely lacking at
certain operators. "We found once we started offering these
services that traders would ask us all the time to fiddle the
index because they don’t like the way
it’s going," he says. "These desks are under
extreme pressure to enhance performance – and this is
So far there are just over 66,000 third-country benchmarks
to have received authorisation; the vast majority of which are
in the US.
What benchmarks will be regulated?
The main principle of the BMR’s scope is the
end purpose of the benchmark. For an index to be considered a
benchmark, it needs to be referenced by either a financial
instrument which is traded on a trading venue (a Mifid annex is
cited here) or via a systematic internaliser, a financial
contract, or an investment fund.
The figure also has to be published or made available to the
public, which the regulator considers an "indeterminate number
of persons". That’s obviously vague –
some believe this was deliberate – and can be
interpreted in a whole range of ways.
When will it be implemented?
As with many EU regulations, there have been various phases
to the BMR. Some were effective from January 1 2018; the whole
hog was initially intended for January 1 2020. But in a
slightly embarrassing concession from EU lawmakers, that date
was pushed back to 2022 for critical and third-country
"I think some of the regulators themselves also acknowledged
that they couldn’t meet the deadline either," says
Rick Redding, chief executive of the Index Industry
Association. "Some providers were actually a little upset about
the delay as they’d spent so much time and money
getting ready, but I think it was the right move."
At that point not a single Asian benchmark provider had
What about Brexit?
The eternal question.
Of the 36 EU-based benchmark administrators on the Esma
register so far, exactly half are in the UK – so
Brexit is incredibly pertinent.
The FCA has created its own UK Benchmarks Regulation and
launched its own benchmarks register to replace the Esma
database in the event of a no-deal Brexit.
Are there opportunities?
As with any key piece of regulation, there are winners and
losers. Potential losers include third-country benchmarks who
lack the time, resource or backing from management to seek Esma
There are plenty looking to maximise the opportunities, too,
by offering third country benchmark administrators a route in
to the EU via either recognition or endorsement.
It’s a risky business though. Endorsers take on
the entirety of the legal risk for that benchmark –
which many are not too keen on.
"We’re talking to some people about it, but
carefully weighing the level of exposure against the
provider’s willingness to give us full governance
access," one such firm
told Practice Insight last year.