On 29 June 2016, Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the Benchmarks Regulation) was published in the Official Journal of the EU. It entered into force on 30 June 2016. The Benchmarks Regulation generally applies from 1 January 2018 subject to certain transitional provisions (see below). The Benchmarks Regulation, being directly applicable in Member States, will supersede the UK’s existing requirements.
Article 3(3) of the Benchmarks Regulation sets out the definition of “benchmark”. The definition does not hinge on what the benchmark references, but how it is used:
“’benchmark’ means any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees.”
Article 3(1) of the Benchmarks Regulation defines an “index” as meaning any figure
- that is published or made available to the public; and
- that is regularly determined:
- (i) entirely or partially by the application of a formula or any other method of calculation, or by an assessment; and
- (ii) on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes or other values or surveys.
A Commission Delegated Regulation sets out further guidance as to the meaning of “published or made available to the public” (Commission Delegated Regulation of 29 September 2017 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council specifying technical elements of the definitions laid down in paragraph 1 of Article 3 of the Regulation).
Article 2 of the Benchmarks Regulation sets out certain exemptions to the definition of benchmark. Benchmarks provided by central banks or other authorities for public policy purposes are excluded. Also, benchmarks that reference a price of a single financial instrument (such as the price of a specific share) are not in scope1. Standard variable rates offered by credit institutions will not be considered benchmarks when used in mortgage or consumer credit contracts.
Applying the principle of proportionality, the Benchmarks Regulation classifies benchmarks as ‘critical’, ‘significant’ and ‘non-significant’, and the nature and degree of the requirements under it will be determined by these classifications. A benchmark is deemed to be either ‘critical’ or ‘significant’ where it satisfies the conditions set out in Articles 20(1) or 24(1) of the Benchmarks Regulation2. A ‘non-significant’ benchmark is one that meets the definition of ‘benchmark’ but does not satisfy the conditions to be either a critical or significant benchmark (Article 3(27) of the Benchmarks Regulation)3. The Benchmarks Regulation also contains requirements for different types of benchmark: regulated-data benchmarks (Article 17), interest rate benchmarks (Article 18) and commodity benchmarks (Article 19).
The primary impact of the Benchmarks Regulation will be on benchmark administrators, as it introduces a requirement for their prior-authorisation/registration (Article 34) and ongoing supervision (Articles 4 to 14 and 27 to 28). Where an administrator has been authorised its details shall be placed on a public register maintained by the European Securities and Markets Authority (ESMA) (Article 36 of the Benchmarks Regulation). ESMA will start publishing this register as from 1 January 2018. The ongoing requirements, like the IOSCO Principles, cover governance and accountability as well as the design and methodology of any benchmarks provided.
The Benchmarks Regulation also introduces a code of conduct for contributors of input data requiring the use of robust methodologies and sufficient and reliable data (Article 15 of the Benchmarks Regulation). It also sets out governance and control requirements for contributors (Article 16 of the Benchmarks Regulation).
The Benchmark Regulation also impacts users of benchmarks who are already 'supervised entities' (defined in Article 3(17) of the Benchmarks Regulation). This includes alternative investment fund managers (AIFMs), undertakings for collective investment in transferable securities (UCITS) management companies (and self-managed UCITS), MiFID II investment firms and credit institutions as defined by the Capital Requirements Regulation.
Supervised entities will need to consider carefully whether they ‘use’ a benchmark. Article 3(7) of the Benchmarks Regulation defines ‘use of a benchmark’ as:
- issuance of a financial instrument which references an index or a combination of indices;
- determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices;
- being a party to a financial contract which references an index or a combination of indices;
- providing a borrowing rate as defined in point (j) of Article 3 of Directive 2008/48/EC calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference in a financial contract to which the creditor is a party; and
- measuring the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio, or of computing the performance fees.