The Benchmark Regulation (BMR) was introduced in 2016 to counter abusive practices in the calculation and provision of benchmarks in the future. The LIBOR scandal had uncovered widespread abuse here.
Since then, the administration of benchmarks, their use and the provision of data have been strictly regulated. Any kind of use leads to a bank having to deal at least with the conditions and obligations of BMR attached to it. This is already the case if loans are granted on a EURIBOR basis or the interest on deposits is variably linked to an index. If the bank itself is an administrator of benchmarks, there are also extensive obligations. Not every bank, however, conducts this business to such an extent that the high expense appears justified.
The legislator has taken this into account by allowing financial institutions to opt out from certain obligations in case they only administer non-significant benchmarks (Art. 26 (1) BMR). In the implementation project it makes sense to clarify these facilitations comprehensively with the competent authority (in Germany the BaFin) already when applying for the administrator status. The facilitations include, for example, the waiver of a complete organisational separation of the administrator’s business area from other areas with the aim of avoiding actual or potential conflicts of interest. The role of the supervisory function and the so-called control framework can also be designed by means of an opt-out in such a way that no unreasonably high expenditure arises.
Users of benchmarks must keep a benchmark register. This results from Art. 28 (2) and Art. 29 (1) BMR. This register is essential to ensure that the benchmarks used are administered in accordance with the rules. If there is no completeness here, the user can never know exactly what effects the abandonment of a benchmark or a significant change will have on his products and contracts. For this purpose, it makes sense to take the data from the ESMA register (cf. Art. 36 BMR) and supplement it with internal information, in particular indications of in which areas of the bank, in which products and under whose responsibility the benchmarks are used.
In order to check completeness, it is important that there is a functioning 1st level control, because it is very difficult to establish this at the 2nd level, especially in the case of institutions that conduct extensive capital market business.
Important: this register also includes benchmarks published by central banks or other government agencies. These bodies may not be administrators in the sense of the BMR and they are excluded from the subjective scope of application of the BMR (Art. 2 para. 2 BMR). However, the benchmarks published by them are to be treated in the same way on the user side as benchmarks published by registered administrators.
Note: It is only apparent from the Q&A that there are no restrictions on the use of benchmarks from central banks, i.e. the country of domicile of the central bank is irrelevant here (Q4.1 and A4.1 of ESMA QA 70-145-114 version 18 of 31.03.2021). However, according to information from BaFin, the same also applies to other government bodies that issue benchmarks or indices, i.e. in particular statistical authorities.
In the BMR, this register basically has the role of providing users of benchmarks with information on whether the respective administrator has an authorisation in the EU. The following special features must be taken into account here:
Central banks and other state bodies are not included here, as they are not subject to the application of the BMR. With BREXIT, all administrators domiciled in the UK were also deleted from the register, as were all administrators who received their authorisation from the FCA. They now have until the end of 2023 to submit a new application for authorisation to one of the national supervisory authorities. However, their benchmarks may continue to be used during this time.
For the administrator register to be kept internally, it follows that these firms should remain listed here, but with the note that they do not currently have EU authorisation as an administrator. In this way, however, further developments can be monitored. For the sake of completeness, it is also advisable to include central banks and other state bodies here, even if this is not prescribed by the BMR.
According to Art. 26 (1) BMR, administrators who exclusively administer non-significant indices according to Art. 24 (1) BMR are provided with opt-outs that are useful to reduce the administrative burden. These opt-outs are particularly interesting for companies that are only active as administrators of benchmarks to a limited extent. The opt-outs saves them from a) having a complete organisational separation of areas that may lead to an actual or potential conflict of interest, b) the designation of an internal body to oversee the benchmark methodology, c) the validation of input data in a separate process, etc. Since the choice of opt-outs is partly decisive for the scope of implementation, it is recommended to discuss this with BaFin at the time of application.
When formulating the code of conduct to be observed according to Art. 15 (2) BMR, the legislator obviously had persons or departments at other market participants in mind who, also under the impression of the LIBOR scandal, would have to be subjected to a special code of conduct. In the case of market-leading vendors such as Bloomberg or Reuters, on the other hand, it will be practically impossible to subject them to the codes of a large number of clients. Here, the reference to the origin of the data must suffice.
Insofar as data are supplied by market-leading vendors such as Bloomberg or Reuters and these data pass through a central market data control and are then also used by other departments of the institution, it seems appropriate to dispense with a separate control of the input data.
The review of non-critical benchmarks is carried out in two stages. In the first stage (Art. 20 Para. 1 BMR), critical reference values are distinguished from non-critical ones. A reference value is critical if it forms the basis for the valuation of financial instruments with a value of at least € 500 billion or if the majority of its contributors are located in a member state and is classified as critical in this country. Under c) there are further conditions that must be fulfilled cumulatively. If the criteria from Art. 20 para. 1 are not all fulfilled, it is examined according to Art. 24 para. 1 BMR whether it is a significant benchmark. This is affirmed if it is a benchmark of financial instruments whose total value amounts to at least € 50 billion or its elimination would have significant and adverse effects.
Compliance with the limit of € 50 billion in particular must be monitored on an ongoing basis in order to continue to be able to take advantage of the opt-outs.