Recent months have seen European index providers rushing to register as benchmark administrators under the Benchmark Regulation (BMR) as the deadline looms, however, third country administrators are yet to get going given their two year longer transitioning period.
Following the manipulation scandals of major interest rates such as LIBOR and EURIBOR back in 2012, the European Union introduced BMR in 2018 which requires all benchmark providers to register as a benchmark administrator to continue business as usual.
Two separate deadlines have been put in place for benchmark providers within the European Union and for those outside. European providers must register by the end of 2019 whereas third country benchmark providers have until 31 December 2021.
An original deadline was set two years prior but was extended as a significant volume of benchmark providers were not ready by the initial deadline.
However, according to a report by PwC, no administrator from the Asia and Pacific (APAC) region has been recognised by the European Securities and Markets Authority (ESMA) or has had their benchmarks endorsed. The European Commission has only issued two limited equivalence decisions for specific benchmarks in Australia and Singapore.
Within Europe, index providers have been racing to register under BMR by the year’s end such as Bloomberg and ROBO Global with a few months to spare, however, not every company is ready such as Morningstar which is still yet to register.
Despite third country benchmark providers having over two years to register under the regulation, the executives’ meeting of East Asia-Pacific central banks (EMEAP) advises its members to engage with the European Commission as soon as possible.
The impact of the EU Benchmarks Regulation on the ETF industry
This entails preparing early for the transition by performing a gap analysis on the companies’ benchmark or index business against the International Organisation of Securities Commission (IOSCO) principles.
Additionally, discussions with ESMA are vital to put in place a local benchmark regulation which first must be agreed by the local authority and can be a lengthy project.
PwC believes there is enough time for third country administrators to get BMR recognition or endorsement approved by the end of 2021 provided they start taking action now.
A review of third country regime by the European Union authorities represents a further unknown and could lead to potential changes in the future. The European Commission is required to submit a report by 1 April 2020 to look at the consequences of the extension of the transitional period.
To add another spanner to the works, uncertainty around Brexit is adding further complications to the regulation. PwC says it is likely third country administrators will need to seek approval separately by regulators both in the UK and EU.