Few in financial services will have missed the advent of MiFID II. So intense was the interest, it would have been easy to overlook the EU Benchmarks Regulation, which will also have significant implications for the buy-side in 2018.
The Benchmarks Regulation imposes requirements on firms that provide, contribute to or use a wide range of indices and reference prices and was introduced in response to the Libor scandal and the allegations of manipulation of foreign exchange and commodity benchmarks. In their implementation plans, firms across the financial services sector will have been reviewing their activities to determine whether they are ‘administrators’, ‘contributors’ or ‘users’ of benchmarks and what is required of such groups.
For asset managers, one of the key requirements will be those that relate to users of benchmarks. Managers must determine whether they are users of benchmarks, in which case they must comply with requirements such as: only using a benchmark provided by an EU-authorised or third-country administrator included on the Esma register; including appropriate disclosures in a Ucits prospectus; and having in place contingency plans that are reflected in client documentation and must be provided to the regulatory authorities on request.
The regulation outlines five uses of a benchmark, so managers will need to consider if any of these are applicable to them. Esma recently issued Q&A about this. In reality, asset managers are likely to be important users of benchmarks, for example in respect of tracker funds and ETFs.
Needless to say, complying with the Benchmarks Regulation will be challenging. Most of its provisions applied from January 1, 2018, subject to important transitional provisions, so what needs to be done and by when?
Managers need to ensure they use only approved indices, from administrators in the EU and in third counties. Under the transitional provisions, benchmark administrators that were already providing a benchmark on June 30, 2016, have until January 1, 2020 to apply for authorisation or registration, so managers can continue to use the existing benchmarks for another two years, unless in the meantime the administrator’s application is refused by its regulator.
Managers must have in place contingency plans in the event that the benchmark is no longer available or materially changes, be able to provide this on request to their regulator and reflect the contents in client documentation. The application dates for these requirements vary: the obligation to ‘produce and provide’ the plan applies from January 1, 2018. Only client contracts entered into after that date need to reflect the fallback plan, with earlier contracts being amended, if practicable, on a ‘best efforts’ basis.
Prospectuses must be updated to disclose the use of the benchmark to investors. For existing Ucits, this must be done at the next update or by the end of 2018 and for new Ucits from January 1, 2018 onwards.
Although the frenetic activity of 2017 has passed, 2018 looks set to be another busy year, with the Benchmarks Regulation being a key area of focus for asset managers.
Owen Lysak is Partner with Clifford Chance
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