The new EU benchmarks regulation: What you need to know

Transcription

1 Briefig ote September 2016 The ew EU bechmarks regulatio: What you eed to kow The ew EU Regulatio o fiacial bechmarks has bee published i the Official Joural ad has ow etered ito force. The Regulatio imposes ew requiremets o firms that provide, cotribute to or use a wide rage of iterest rate, currecy, securities, commodity ad other idices ad referece prices. Most of the ew rules will ot apply util 1 Jauary 2018 but some provisios relatig to critical bechmarks are already i effect ad the Commissio has already desigated the first critical bechmark uder the Regulatio. Cosultatios have begu o the Level 2 measures to be adopted uder the Regulatio. The ew rules preset a sigificat implemetatio challege, particularly where EU firms referece o-eu bechmarks i securities or derivatives or use them i the maagemet of ivestmet fuds. Objectives The ew Regulatio is a key part of the EU s respose to the LIBOR scadal ad the allegatios of maipulatio of foreig exchage ad commodity bechmarks. It aims to reduce the risk of maipulatio of bechmarks by addressig coflicts of iterest, goverace cotrols ad the use of discretio i the bechmark-settig process. It requires EU admiistrators of a broad class of bechmarks to be authorised or registered by a atioal regulator ad to implemet goverace systems ad other cotrols to esure the itegrity ad reliability of their bechmarks. These build o but go beyod the 2013 Priciples for Fiacial Bechmarks ad the 2012 Priciples for Oil Price Reportig Agecies adopted by the Iteratioal Orgaisatio of Securities Commissios (IOSCO). Supervised etities uder EU legislatio, icludig baks, ivestmet firms, isurace compaies, UCITS ad pesio fuds, fud maagers ad cosumer leders, will also be subject to restrictios o usig bechmarks uless they are produced by a EU admiistrator authorised or registered uder the Regulatio or are o-eu bechmarks that have bee qualified for use i the EU uder the Regulatio s third coutry regime. EU admiistrators must require all cotributors to their bechmarks to comply with a code of coduct ad the Regulatio will directly require supervised etities that cotribute to EU bechmarks to maitai systems ad cotrols to esure the itegrity ad reliability of their iput data. The ew EU regime will replace the curret UK framework regulatig the admiistrators of LIBOR ad other specified bechmarks. It takes a very differet approach from those jurisdictios, such as Japa ad Sigapore, that like the UK have so far chose to regulate a limited rage of critical bechmarks ad those jurisdictios, such as the US, that are relyig o self-regulatio ad robust eforcemet actio to achieve the objectives of the IOSCO Priciples. The Regulatio provides three routes allowig the use of o-eu bechmarks i the EU. However, o-eu admiistrators may ot be willig or able to qualify their bechmarks for use i the EU uder this regime. Key issues New EU regime regulatig producers, cotributors to ad users of bechmarks Covers iterest rate, FX, securities, commodity ad other bechmarks used i fiacial trasactios Most provisios of the Regulatio apply from 1 Jauary 2018 EU bechmark admiistrators must be authorised or registered ad implemet ew systems ad cotrols New rules for firms cotributig iput data to EU bechmarks Supervised etities must ot use uregulated bechmarks i the EU i securities or derivatives traded o a veue or via a systematic iteraliser, certai cosumer loas or ivestmet fuds No-EU bechmarks ca oly be used i the EU if the bechmark is qualified uder the third coutry regime Trasitioal provisios do ot specifically address ew bechmarks lauched after 30 Jue 2016 Risk that some bechmarks may be discotiued ad some o-eu bechmarks may ot qualify uder the third coutry regime.

2 2 The ew EU bechmarks regulatio: What you eed to kow Timig ad trasitioal arragemets The Regulatio etered ito force o 30 Jue The provisios relatig to the madatory admiistratio of ad madatory cotributio to critical bechmarks came ito effect immediately ad the Commissio has already adopted a implemetig act desigatig Euribor as a critical bechmark for the purposes of the Regulatio. The early applicatio of these provisios o critical bechmarks is iteded to prevet critical bechmarks from beig udermied by a exodus of cotributors. The rest of the Regulatio will apply from 1 Jauary EU bechmark admiistrators providig bechmarks o 30 Jue 2016 will have util 1 Jauary 2020 to apply for authorisatio or registratio. Trasitioal provisios will allow these admiistrators to cotiue to provide those existig bechmarks (ad for supervised etities to cotiue to use those bechmarks) util 1 Jauary 2020 or, if a admiistrator applies for authorisatio or registratio before that date, util their applicatio is refused. However, the Regulatio does ot provide supervised etities with a meas of idetifyig whether a applicatio has bee or whe it has bee refused. I additio, the Regulatio does ot cotai provisios statig that admiistrators applyig for authorisatio or registratio after 1 Jauary 2018 ca delay compliace with the other requiremets of the Regulatio. After 1 Jauary 2020 atioal regulators will be able to permit the cotiued use of a existig bechmark provided by a EU admiistrator that does ot comply with the Regulatio if cessatio or chage to the bechmark would cause a force majeure evet, frustrate or breach the terms of a fiacial istrumet, fiacial cotract or rules of a ivestmet fud that refereces that bechmark. No fiacial istrumets, fiacial cotracts or measuremets of the performace of a ivestmet fud will be able to add a referece to the existig EU bechmark after 1 Jauary 2020 but o specific provisios allow for the cotiued productio of the bechmark after that date. Where a bechmark provided by a o-eu admiistrator is already used i the EU o 30 Jue 2016 ad has ot yet bee qualified for use i the EU uder the Regulatio s third coutry regime, the its use i the EU will oly be permitted i a fiacial istrumet or fiacial cotract, or for measurig the performace of a ivestmet fud, that already refereces the bechmark or adds a referece to the bechmark before 1 Jauary EU Bechmarks Regulatio timelie December 2015: Coucil ad Parliamet agree compromise text 29 Jue 2016: Publicatio i OJ 30 Jue 2016: Etry ito force 1 Jauary 2018: Regulatio applies (18 moths after etry ito force) 1 Jauary 2020: Deadlie / cut-off date uder trasitioal provisios for admiistrators of existig bechmarks (42 moths after etry ito force) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1 April 2017: Deadlie for ESMA to submit fial draft RTS/ITS (9 moths after etry ito force) Fial RTS/ITS published i OJ (estimated) 3 July 2016: MAR applies 3 Jauary 2018: MiFID2/MiFIR apply Note: The Regulatio does ot prescribe a timetable for the adoptio of the Commissio s delegated ad implemetig acts or ESMA s guidelies uder the Regulatio. Clifford Chace, September 2016

3 The ew EU bechmarks regulatio: What you eed to kow 3 The Regulatio does ot appear to allow the cotiued use i the EU after 1 Jauary 2018 of bechmarks provided by a EU admiistrator for the first time after 30 Jue 2016 or of bechmarks provided by a o-eu admiistrator that are used i the EU for the first time after 30 Jue 2016, uless ad util the EU admiistrator is authorised or registered uder the Regulatio or the o-eu bechmark is qualified for use i the EU uder the third coutry regime. However, this could create a hiatus durig which use of these bechmarks i the EU must cease from 1 Jauary 2018 util the admiistrator has achieved authorisatio or registratio or qualificatio of the bechmark for use i the EU. The ew Regulatio requires the Europea Securities ad Markets Authority (ESMA) to draft regulatory ad implemetig techical stadards (RTS/ITS) specifyig the detail of may of the requiremets. The Regulatio requires ESMA to deliver fial drafts to the Commissio by 1 April The Commissio may choose to amed those stadards ad the Parliamet ad the Coucil must be give a period i which to object to ay RTS. The Regulatio also evisages that ESMA will issue guidelies ad that the Commissio will adopt delegated acts further defiig other aspects of the Regulatio. These may also oly be available at a late stage before the date of applicatio. Thus, the full set of fial requiremets may oly be available shortly before the Regulatio begis to apply, complicatig implemetatio plaig for firms. O 15 February 2016, ESMA issued a discussio paper cosultig o its iitial proposals for the techical stadards ad its techical advice to the Europea Commissio o its delegated acts. O 27 May 2016, ESMA issued a cosultatio paper o its draft techical advice. The commet periods for these papers have ow closed. ESMA is expected to issue a further cosultatio paper o its draft techical stadards before the ed of The Regulatio will apply i the UK before the likely earliest date o which the UK could withdraw from the EU. UK regulators have made clear that UK firms should cotiue to implemet existig ad ew EU legislatio otwithstadig the UK s plaed exit from the EU. The start date of 1 Jauary 2018 also meas that the Regulatio takes effect shortly before the revised effective date (3 Jauary 2018) of the ew Markets i Fiacial Istrumets Directive ad Regulatio (MiFID2/MiFIR) eve though the ew Regulatio relies o several cocepts used i MiFID2/MiFIR. However, the gap is very short ad may ot sigificatly add to the larger practical issue of idetifyig what istrumets are traded o veues withi the scope of MiFID2/MiFIR ad thus potetially withi the scope of the Regulatio. What bechmarks will be regulated? The ew Regulatio is desiged to cover a very wide rage of idices icludig idices liked to iterest rates, currecies, securities, commodities ad eve factors such as the weather. A idex will be regulated as a bechmark where it determies amouts payable uder or sets the value of fiacial istrumets or fiacial cotracts or is used i ivestmet fuds. The aim is to cover idices used i securities or derivatives traded o a regulated tradig veue uder MiFID2/MiFIR, icludig securities ad derivatives traded outside a veue via a ivestmet firm that is a systematic iteraliser uder MiFID2/MiFIR. The Regulatio also covers idices used to set iterest rates uder certai cosumer loas ad cosumer mortgages as well as the idices used i idex trackig ad some other fuds. This is the case regardless of the volume or systemic relevace of the usage of the idex. A key test will be whether the idex is cosidered to be published or made available to the public. ESMA s Cosultatio Paper proposes that a idex should be cosidered as made available to the public if the idex is accessible by a large or potetially idetermiate umber of recipiets or is provided or is accessible to oe or more supervised etities to allow the use of the idex withi the meaig of the Regulatio ad, through that use, the idex becomes accessible to a idetermiate umber of people. Thus, the regulatio could apply to customised proprietary idices provided by ivestmet baks for specific fiacial istrumets as well as the well-kow idices widely used i the fiacial sector. However, the Regulatio aims to provide a more proportioate ad flexible regime for admiistrators of bechmarks that are ot regarded as beig of critical importace. The Regulatio exempts certai kids of providers ad idices from the scope of the Regulatio. I particular, there are exemptios for cetral baks ad public authorities (both EU ad o-eu) that provide idices for public policy purposes. There is also a importat Clifford Chace, September 2016

4 4 The ew EU bechmarks regulatio: What you eed to kow What is a bechmark? Bechmark Ay idex by referece to which the amout payable uder a fiacial istrumet or fiacial cotract, or the value of a fiacial istrumet is determied or... a idex that is used to measure the performace of a ivestmet fud with the purpose of: Idex Fiacial istrumet Fiacial cotract Ivestmet fud exemptio for sigle referece prices for a idividual security or derivative, but this does ot cover sigle referece prices for commodities. Although ot expressly stated, it seems likely that the Regulatio will ot prevet supervised etities usig idices produced by a perso that is exempted from the scope of the Regulatio. trackig the retur of such idex or defiig the asset allocatio of a portfolio or computig the performace fees. Ay figure: that is published or made available to the public; that is regularly determied, etirely or partially, by the applicatio of a formula or ay other method of calculatio, or by a assessmet; ad o the basis of the value of oe or more uderlyig assets or prices, icludig estimated prices, actual or estimated iterest rates, quotes ad committed quotes or other values or surveys. Ay of the istrumets listed i Sectio C of Aex I of MiFID2: for which a request for admissio to tradig o a tradig veue (as defied i MiFID2) has bee made or which are traded o a tradig veue or via a systematic iteraliser (as defied i MiFID2) Ay credit agreemet covered by the Cosumer Credit Directive or the Mortgage Credit Directive Ay UCITS or alterative ivestmet fud (AIF) Restrictios o use From 1 Jauary 2018 (ad subject to the trasitioal arragemets discussed above) supervised etities will be prohibited from usig idices as a bechmark i the EU uless they are produced by a EU admiistrator icluded o ESMA s register of admiistrators authorised or registered uder the Regulatio or are o-eu bechmarks that are icluded o ESMA s register because they have bee qualified for use i the EU uder the Regulatio s third coutry regime. This prohibitio will ot cover every use of other idices. For example, it will ot prevet supervised etities makig corporate loas or holdig or tradig a security referecig other idices. It should also ot prevet couterparties referecig other idices i a OTC derivative executed outside a regulated EU tradig veue if oe of the couterparties is a systematic iteraliser i relatio to that derivative. ESMA s proposed techical advice would suggest that a couterparty to a OTC derivative cotract should ot be regarded as usig a bechmark by issuig` a fiacial istrumet referecig a idex by eterig ito such a cotract. ESMA proposes that a perso should oly be regarded as issuig a fiacial istrumet for these purposes where the fiacial istrumet takes the form of a trasferable security, moey market istrumet or uit i a collective ivestmet udertakig. Maagers of ivestmet fuds will eed to focus o the precise use they are makig of other idices as the restrictios do ot oly apply to idex-trackig or similar fuds. The Regulatio does ot further defie what will amout to use i the EU. Nor does it specify whether the defiitio of supervised etities will cover etities that fall withi the defiitios of a credit istitutio or ivestmet firm but that would beefit from exemptios uder the relevat legislatio or etities that are established outside the EU (or how the regime applies where supervised etities act through o-eu braches). Clifford Chace, September 2016

5 The ew EU bechmarks regulatio: What you eed to kow 5 What exemptios will apply uder the Regulatio? Exemptio for: Cetral baks Public authorities Cetral couterparties Sigle referece prices Press, media, jouralists Ay perso (cosumer ad mortgage credit) Commodity bechmarks Ivolutary idex providers Additioal coditios Noe Where they cotribute data to, provide, or have cotrol over the provisio of, bechmarks for public policy purposes, icludig measures of employmet, ecoomic activity, ad iflatio Where they provide referece prices or settlemet prices used for CCP risk-maagemet purposes ad settlemet Where the sigle referece price is for a istrumet listed i Sectio C of Aex I of MiFID2 Where they merely publish or refer to a bechmark as part of their jouralistic activities with o cotrol over the provisio of that bechmark Where it grats or promises to grat credit i the course of its trade, busiess or professio, oly i so far as that perso publishes or makes available to the public its ow variable or fixed borrowig rates set by iteral decisios ad applicable oly to credit agreemets covered by the Cosumer Credit Directive or the Mortgage Credit Directive etered ito by that perso or a compay withi the same group with their respective cliets Where: the bechmark is based o submissios by cotributors which are i majority o-supervised etities; the bechmark is refereced by fiacial istrumets for which a request for admissio to tradig has bee made o oly oe tradig veue (as defied i MiFID2), or which are traded o oe such tradig veue; ad the total otioal value of fiacial istrumets referecig the bechmark does ot exceed 100 millio See above for defiitio of fiacial istrumet Where the idex provider of a idex is uaware ad could ot reasoably have bee aware that the idex is used for the purposes set out i the defiitio of a bechmark uder the Regulatio derivatives documetatio provides a framework to address chages to or the discotiuace of idices. The Regulatio does ot clarify whether it has retroactive effect i relatio to existig cotracts. Authorisatio or registratio of EU admiistrators Every perso located i the EU that has cotrol over the provisio of a bechmark will be required to be authorised or registered by a atioal regulator, uless a exemptio applies. However, i some cases, it may be difficult to determie whether a perso is a user of a bechmark or a provider of a bechmark requirig authorisatio or registratio as a admiistrator. The recitals to the Regulatio suggest that weightig idices withi a combiatio of idices to determie the pay-out or the value of a fiacial istrumet or a fiacial cotract or measure the performace of a ivestmet fud will be regarded as the use of a idex rather tha the provisio of a ew idex. The Regulatio also cotais provisios idicatig that a leder i a cosumer loa or mortgage loa will be regarded as a user rather tha a provider of a bechmark if it provides a borrowig rate calculated as a mark-up or spread over a idex i cotracts to which it is a party. However, it does ot make clear that other similar determiatios of a iterest rate based o a mark-up to a bechmark (for example, for the purposes of a listed floatig rate ote) are treated i the same way. Supervised etities that use bechmarks are also required to maitai robust writte cotigecy plas addressig the actios that they would take if a bechmark used by them materially chages or ceases to be produced. Where feasible ad appropriate, the plas must omiate oe or more alterative bechmarks that might be refereced i substitutio for discotiued bechmarks. I additio, supervised etities must reflect these plas i the cotractual relatioship with their cliets. For example, ISDA A perso that provides a idex will ot require authorisatio or registratio if the provider is ot aware ad could ot reasoably have bee aware that its idex is beig used as a bechmark. However, EU providers may require authorisatio or registratio if they Clifford Chace, September 2016

6 6 The ew EU bechmarks regulatio: What you eed to kow What use of bechmarks will be restricted by the Regulatio? Fiacial istrumets The issuace of a fiacial istrumet which refereces a idex or a combiatio of idices The determiatio of the amout payable uder a fiacial istrumet by referecig a idex or a combiatio of idices Fiacial cotracts The determiatio of the amout payable uder a fiacial cotract by referecig a idex or a combiatio of idices Beig party to a fiacial cotract which refereces a idex or a combiatio of idices Providig a iterest rate (expressed as fixed or variable percetage applied o a aual basis to the amout of credit draw dow) calculated as a spread or mark-up over a idex or a combiatio of idices ad that is solely used as a referece i a fiacial cotract to which the creditor is a party Ivestmet fuds Measurig of the performace of a ivestmet fud through a idex or a combiatio of idices for the purpose of trackig the retur of such idex or combiatio of idices, of defiig the asset allocatio of a portfolio or of computig the performace fees See above for defiitios of idex, fiacial istrumet, fiacial cotract ad ivestmet fud become aware that data they publish are beig used as a bechmark, eve if this use is without their coset. Regulatio of EU admiistrators The obligatios that apply to EU bechmark admiistrators maily deped o the type ad category of their bechmarks. There are four broad types of bechmark, depedig o their uderlyig asset or factor: iterest rate bechmarks, commodity bechmarks, regulated-data bechmarks ad other (o-commodity) bechmarks. I additio, there are three differet categories of bechmark: critical, sigificat ad o-sigificat. This creates a highly differetiated regime where differet rules apply to bechmarks with differet characteristics. EU admiistrators that are supervised etities must be registered uder the Regulatio, uless they provide a critical bechmark, whe they must be authorised. EU admiistrators that are ot supervised etities must be authorised uder the Regulatio, uless they provide a o-sigificat bechmark, whe they must be registered (but there is a trasitioal period durig which admiistrators of o-widely used sigificat bechmarks may be registered istead of authorised). The itetio is that registratio should be a faster ad less burdesome procedure tha authorisatio, but registered ad authorised admiistrators are subject to the same compliace obligatios accordig to the type ad category of their bechmarks. Compliace obligatios of EU admiistrators Whe authorised or registered, admiistrators will have to publish a bechmark statemet describig the key features of each regulated bechmark or family of bechmarks that they provide as well as the methodology ad iput data used to calculate the bechmark. I additio, the Regulatio imposes a wide-ragig set of requiremets o bechmark admiistrators regulatig goverace ad coflicts of iterest, iteral oversight, cotrol ad accoutability frameworks, iput data ad bechmark methodologies. I particular, atioal regulators are give powers to require certai bechmark admiistrators to establish a idepedet oversight fuctio (with balaced stakeholder represetatio) if coflicts of iterest caot be adequately mitigated ad ultimately to direct full owership separatio or cessatio of the publicatio of a bechmark if coflicts caot be adequately maaged. Iterest rate bechmarks The Regulatio imposes distict requiremets o iterest rate bechmarks. I particular, admiistrators are required to give priority to iput data from actual trasactios i the uderlyig market over observatios of third party trasactios, committed quotes or idicative quotes or expert judgmet. Admiistrators of iterest rate bechmarks are also required to establish a idepedet oversight committee tasked with regular scrutiy of calculatio methodology, iput data ad wider goverace arragemets. Specific ad comprehesive systems ad cotrols Clifford Chace, September 2016

7 The ew EU bechmarks regulatio: What you eed to kow 7 requiremets also apply to firms cotributig to iterest rate bechmarks. All iterest rate bechmarks are subject to a bieial idepedet exteral compliace audit. Commodity bechmarks The admiistratio of certai commodity bechmarks is subject to a separate set of requiremets. Admiistrators of these commodity bechmarks are required to specify the criteria that defie the physical commodity that is the subject of a particular bechmark. They must give priority to iput data based o cocluded ad reported trasactios as well as data relatig to bids ad offers, i order to preset a accurate picture of the market. There are also special rules relatig to the role of assessors ad a requiremet for a aual idepedet exteral compliace audit. Commodity bechmarks caot beefit from the relief for sigificat or o-sigificat bechmarks but they may be subject to the more oerous rules applicable to critical bechmarks. However, if a commodity bechmark is critical ad its uderlyig is gold, silver or platium the it is subject to the geeral rules for fiacial bechmarks rather tha the special commodities rules. Similarly, if the majority of cotributors to a commodity bechmark are supervised etities, the bechmark is subject to the geeral rules for fiacial bechmarks. Regulated-data bechmarks Admiistrators of regulated-data bechmarks are ot required to comply with certai of the goverace ad cotrol requiremets regulatig the cotributio of iput data. Regulated-data bechmarks are bechmarks determied by the applicatio of a formula from iput data cotributed etirely ad directly from tradig veues, approved publicatio arragemets, approved reportig mechaisms ad certai commodity exchages. The Regulatio ow allows bechmarks based o iput data from certai equivalet o-eu tradig veues to beefit from these rules. Regulated-data bechmarks are ot subject to the additioal requiremets applicable to critical bechmarks. However, regulated-data bechmarks that are ot commodity bechmarks may beefit from the less oerous rules applicable to sigificat or o-sigificat bechmarks if the regulated-data bechmark uderpis busiess valued at up to 500 billio. Critical bechmarks The Commissio has to desigate a list of critical EU bechmarks at least every two years o the basis of the followig: the bechmark uderpis busiess valued at 500b or more; the bechmark has a majority of supervised cotributors i oe Member State ad is recogised as critical i that Member State by its atioal regulator; or the bechmark uderpis busiess valued at 400b or more ad has o or very few appropriate market-led substitutes ad cessatio of or data failures relatig to the bechmark would result i sigificat ad adverse impacts o market itegrity, fiacial stability, cosumers, the real ecoomy or the fiacig of households or corporatios i oe or more Member States (ad atioal regulators ca determie that this coditio is satisfied, icludig waivig the quatitative thresholds). I practice, this gives atioal regulators cosiderable discretio to determie that bechmarks produced by their admiistrators should be desigated as critical bechmarks. Critical bechmarks are subject to additioal requiremets, icludig the followig: a madatory aual exteral audit of compliace; regulators powers to delay the discotiuace of the bechmark by requirig the admiistrator temporarily to cotiue the provisio of the bechmark; a requiremet for the admiistrator to provide liceces of, ad iformatio o, the bechmark to all users o a fair, reasoable, trasparet ad o-discrimiatory basis; regulators may require supervised etities temporarily to cotribute iput data to the bechmark (although they caot be required to eter ito trasactios for this purpose); the admiistrator s home state regulator must establish a college of supervisors to oversee the bechmark, icludig regulators from other Member States where the bechmark is sigificat. The rules o madatory admiistratio ad cotributio to bechmarks took effect o 30 Jue As oted above, the Commissio has already adopted a implemetig act desigatig Euribor as a critical bechmark for the purposes of the Regulatio. Sigificat ad o-sigificat bechmarks No-critical fiacial bechmarks will be treated as sigificat bechmarks if: the bechmark uderpis busiess valued at 50b or more; or the bechmark has o or very few appropriate market-led substitutes ad cessatio of or data failures relatig to the bechmark would result i sigificat ad adverse impacts o market itegrity, fiacial Clifford Chace, September 2016

8 8 The ew EU bechmarks regulatio: What you eed to kow stability, cosumers, the real ecoomy or the fiacig of households or corporatios i oe or more Member States. Other bechmarks are treated as o-sigificat. However, it may be difficult for the admiistrator of a bechmark to establish whether the bechmark should be treated as o-sigificat, particularly where the admiistrator has o direct iformatio o the volume of busiess uderpied by the bechmark. The admiistrator of a sigificat bechmark has the optio to comply or explai i relatio to some compliace obligatios, i particular as regards the operatioal separatio of bechmark activities from other busiess activities. However, atioal regulators have the discretio to override this optio takig ito accout the ature or impact of the bechmark or the size of the admiistrator. The admiistrator of a o-sigificat bechmark ca make greater use of comply or explai (without a regulatory override). Such admiistrators are also exempt from some of the detailed techical stadards made uder the ew Regulatio, although ESMA may issue guidelies for these admiistrators. Cotributors Where a bechmark is based o iput data from cotributors, the admiistrator must develop a code of coduct for cotributors ad esure that cotributors adhere to the code. The admiistrator must also moitor iput data ad cotributors so as to be able to report suspected market abuse to its atioal regulator. The Regulatio imposes obligatios o supervised etities that cotribute iput data to bechmarks provided by EU admiistrators to esure that the data is ot affected by coflicts of iterest, that ay discretio is idepedetly ad hoestly exercised based o relevat iformatio i accordace with the code of coduct ad to have a cotrol framework ad effective systems ad cotrols to esure the itegrity, accuracy ad reliability of iput data ad compliace with the code of coduct. These rules o cotributio of iput data do ot apply to cotributio of iput data to bechmarks subject to the separate rules o commodity bechmarks, which impose more limited obligatios o the admiistrator as regards iput data. No-EU bechmarks There are three routes through which o-eu admiistrators ca qualify their bechmarks for use i the EU uder the Regulatio: equivalece, recogitio ad edorsemet. However, all three routes preset practical challeges ad some o-eu admiistrators may ot be willig or able to qualify their bechmarks for use i the EU uder the third coutry regime. No-EU admiistrators may have limited icetives to do this, particularly where their bechmark is made available free of charge or they derive relatively low licece reveues from the EU. All three routes do allow EU regulators to rely o a admiistrator s compliace with the IOSCO Priciples, at least if compliace is equivalet to the requiremets of the Regulatio. However, some of the requiremets of the Regulatio appear to go beyod the requiremets of the IOSCO Priciples ad it is ot clear how these types of icosistecy might affect equivalece decisios. Equivalece ESMA will be able to register a bechmark provided by a o-eu admiistrator as qualified for use i the EU if: the Commissio has adopted a equivalece decisio; the admiistrator is authorised or registered, ad is supervised, i the o-eu state; the admiistrator has otified ESMA of its coset to the use of its bechmarks i the EU by supervised etities (ad of a list of the bechmarks ad of the relevat o- EU regulator); ad cooperatio arragemets betwee ESMA ad the o-eu authority are operatioal. The Commissio will be able to adopt a equivalece decisio with respect to a o-eu state if admiistrators authorised or registered i that state comply with bidig requiremets that are equivalet to the Regulatio. Alteratively, the Commissio will be able to adopt a equivalece decisio if there are bidig requiremets i the o-eu state equivalet to the Regulatio with respect to a specific o-eu admiistrator or bechmark or bechmark family. This provides some flexibility as it will allow the Commissio to make equivalece decisios for o-eu bechmarks i those cases where a o-eu state oly regulates a limited category of critical bechmarks o a equivalet basis. At preset, relatively few o-eu states could qualify for a equivalece determiatio for ay bechmarks. I either case, the o-eu requiremets must be subject to effective o-goig oversight ad eforcemet i the o-eu state. I determiig equivalece, the Commissio ca take ito accout if the legal framework ad supervisory practice Clifford Chace, September 2016

9 The ew EU bechmarks regulatio: What you eed to kow 9 i the o-eu state esures compliace with the IOSCO Priciples. Recogitio Pedig a Commissio equivalece determiatio, ESMA will be able to register a bechmark provided by a o-eu admiistrator as qualified for use i the EU if the admiistrator has bee recogised by the atioal regulator i its EU Member State of referece ad maitais a legal represetative i that Member State. The o-eu admiistrator will have to comply with most of the obligatios applicable to EU admiistrators. It will be allowed to fulfil that compliace obligatio by applyig the IOSCO Priciples but oly if the atioal regulator determies that their applicatio is equivalet to compliace with the requiremets established i the Regulatio. The relevat atioal regulator will be able to rely o a auditor s or supervisor s certificatio as to IOSCO compliace, but eve where this ca be provided, it is ot clear how ofte it will eed to be updated or the circumstaces i which atioal regulators could choose to look behid the certificatio. No-EU admiistrators will also have to idetify their Member State of referece applyig rules that take ito accout the locatio of affiliated supervised etities, the locatio of tradig veues for fiacial istrumets referecig their bechmarks ad the locatio of supervised etities usig their bechmarks. I some cases, it may be difficult for o-eu admiistrators to idetify the Member State of referece because they do ot have the required iformatio o the locatio of tradig or use of its bechmarks. The o-eu admiistrator will also have to esure that the legal represetative ca perform a oversight fuctio i relatio to the bechmark together with the admiistrator ad the legal represetative will be accoutable to the atioal regulator i this respect. It may be difficult to agree appropriate arragemets with the legal represetative. If the admiistrator is subject to supervisio, regulatory cooperatio agreemets must be i place with ESMA. I additio, local law, regulatio or admiistrative practices must ot prevet the atioal regulator from exercisig supervisio over the o-eu admiistrator. Edorsemet ESMA will also be able to register a bechmark provided by a o-eu admiistrator as qualified for use i the EU if a admiistrator or other supervised etity i the EU has bee authorised by its atioal regulator to edorse the bechmark. The edorsig etity will have to have a clear ad well defied role withi the cotrol or accoutability framework of the third coutry admiistrator that allows it to effectively moitor the provisio of the bechmark. This may ot be straightforward, especially if the edorsig etity is ot i the same group as the admiistrator. The edorsig etity is resposible for compliace with the Regulatio ad will have to satisfy its atioal regulator that the provisio of the third coutry bechmark fulfils madatory or volutary requiremets i the o-eu coutry that are at least as striget as those uder the Regulatio. Agai, the atioal regulator is allowed to take ito accout compliace with the IOSCO Priciples if this is equivalet to compliace with the requiremets established i the Regulatio. The atioal regulator must refuse authorisatio uless there is a objective reaso to provide the bechmark outside the EU ad edorse it i the EU. Supervisory ad eforcemet powers Natioal regulators will have a wide rage of supervisory ad ivestigatory powers to access data, require iformatio, coduct o-site ispectios ad request the freezig or sequestratio of assets. Member States must also give atioal regulators powers to take admiistrative measures ad impose sactios, icludig cease ad desist orders, profit disgorgemet, warigs, suspesio ad withdrawal of authorisatio, limitatios o atural persos performig maagemet fuctios as well as fiacial pealties o both atural ad legal persos (of up to at least 500,000 or equivalet for atural persos ad i certai cases of up to at least 10% of turover for legal persos). Some Member States may choose to apply crimial pealties to cotravetios. The Regulatio gives Member States util 1 Jauary 2018 to adopt atioal rules o pealties ad other sactios for cotravetio of the Regulatio ad otify these to the Commissio. Natioal courts may also be able to impose civil liability o persos that cotravee the requiremets of the Regulatio uder the geeral priciples applicable to EU regulatios. Other legislatio ad review The Regulatio requires tradig veues to iclude details of the relevat bechmarks ad their admiistrators whe they otify their atioal regulator uder the Market Abuse Regulatio (MAR) of fiacial istrumets traded o their systems that referece a Clifford Chace, September 2016

10 10 The ew EU bechmarks regulatio: What you eed to kow bechmark. This will provide some trasparecy as to the fiacial istrumets that are withi the scope of the Regulatio. The Regulatio requires prospectuses for securities ad UCITS referecig a bechmark to cotai clear ad promiet iformatio statig whether the bechmark is provided by a admiistrator icluded i the ESMA register of admiistrators. The Regulatio ameds the Cosumer Credit Directive ad the Mortgage Credit Directive so as to require leders makig loas regulated by those Directives which referece a bechmark to disclose to cosumers the ame of the bechmark ad its admiistrator ad the implicatios of the use of the bechmark for the cosumer. The Regulatio gives Member States util 1 July 2018 to adopt the ecessary implemetig rules uder those Directives ad to brig them ito force. The Regulatio has also ameded MAR to provide relief to persos dischargig maagerial resposibility i a issuer (ad persos closely coected with them) from the requiremet to disclose trasactios i fiacial istrumets liked to securities of the issuer, i particular where those securities do ot exceed 20% of the relevat exposure or uderlyig ivestmets. There is also other existig EU legislatio o bechmarks. MAR already specifically regulates the maipulatio of fiacial bechmarks ad the maipulatio of power ad gas bechmarks may also be covered by the Regulatio o Eergy Market Itegrity ad Trasparecy (REMIT). MiFID2/MiFIR will itroduce rules givig CCPs ad tradig veues rights of o-discrimiatory access to bechmarks. The Commissio is required to carry out a review of the Regulatio by 1 Jauary Impact ad implemetatio EU etities will eed to idetify all idices produced or cotrolled by them that may qualify as regulated bechmarks uder the ew Regulatio (icludig proprietary or customised idices) ad cosider how to be authorised or registered uder the Regulatio. They will also eed to overhaul their iteral procedures i order to meet the ew stadards for the provisio of bechmarks, eve if they already implemet the IOSCO Priciples. Similarly, firms will eed to idetify where they cotribute iput data to bechmarks admiistered by EU etities. Where relevat, they will eed to review their willigess to adhere to the admiistrator s code of coduct ad, if they are supervised etities, to comply with the direct obligatios imposed by the Regulatio o supervised cotributors. A admiistrator may ask calculatio agets ad other service providers to comply with additioal requiremets to esure its compliace with the Regulatio. Admiistrators that are located outside the EU will eed to assess whether they are willig ad able to qualify their bechmarks i the EU uder the third coutry regime. Supervised etities eed to idetify which of their busiess lies are egaged i activities that may costitute the use of a bechmark i the EU (for example, whe issuig securities or eterig ito derivatives cotracts, makig cosumer loas or maagig a fud). They will eed to idetify whether the admiistrators of relevat bechmarks will cotiue providig the bechmarks ad the admiistrators plas for complyig with the ew regime (i particular, i the case of o-eu admiistrators). They will also eed to prepare cotigecy plas, cotract remediatio programmes ad prospectus ad cosumer disclosures, as appropriate. Coclusio The ew Regulatio imposes broadragig ad exactig requiremets o a wide rage of market participats. It may reiforce the tred to discotiue bechmarks ad referece prices ad may result i some o-eu bechmarks becomig uavailable for use i the EU, restrictig the rage of hedgig ad ivestmet products available i the EU. Market participats will eed to create implemetatio plas to prepare for full compliace with the Regulatio's requiremets by 1 Jauary Clifford Chace, September 2016

11 The ew EU bechmarks regulatio: What you eed to kow 11 Cotacts Christopher Bates Parter, Lodo T: E: cliffordchace.com Marc Bezler Parter, Frakfurt T: E: cliffordchace.com Lucio Boavitacola Parter, Mila T: E: cliffordchace.com Mark Campbell Parter, Lodo T: E: cliffordchace.com Charles Cochrae Parter, Lodo T: E: cliffordchace.com Carolie Dawso Seior Associate, Lodo T: E: cliffordchace.com Frak Graaf Parter, Amsterdam T: E: cliffordchace.com Sea Kerr Seior Associate PSL, Lodo T: E: cliffordchace.com Frederick Lacroix Parter, Paris T: E: cliffordchace.com Paul Leiha Lawyer, Lodo T: E: cliffordchace.com Toby Ma Seior PSL, Lodo T: E: cliffordchace.com Nicola Wherity Parter, Lodo T: E: cliffordchace.com Clifford Chace, September 2016

12 12 The ew EU bechmarks regulatio: What you eed to kow For more iformatio visit the Bechmark reform ad regulatio Topic Guide >> For more iformatio please visit Clifford Chace, September Clifford Chace LLP is a limited liability partership registered i Eglad ad Wales uder umber OC Registered office: 10 Upper Bak Street, Lodo, E14 5JJ. We use the word parter to refer to a member of Clifford Chace LLP, or a employee or cosultat with equivalet stadig ad qualificatios. This publicatio does ot ecessarily deal with every importat topic or cover every aspect of the topics with which it deals. It is ot desiged to provide legal or other advice. If you do ot wish to receive further iformatio from Clifford Chace about evets or legal developmets which we believe may be of iterest to you, please either sed a to omorecotact@cliffordchace.com or cotact our database admiistrator by post at Clifford Chace LLP, 10 Upper Bak Street, Caary Wharf, Lodo E14 5JJ. Abu Dhabi Amsterdam Bagkok Barceloa Beijig Brussels Bucharest Casablaca Doha Dubai Düsseldorf Frakfurt Hog Kog Istabul Jakarta* Lodo Luxembourg Madrid Mila Moscow Muich New York Paris Perth Prague Riyadh Rome São Paulo Seoul Shaghai Sigapore Sydey Tokyo Warsaw Washigto, D.C. *Lida Widyati ad Parters i associatio with Clifford Chace. Clifford Chace has a best frieds relatioship with Redcliffe Parters i Ukraie. J