Industry Updates

BMR is the 'Brexit version of regulation'

George Geddes

a person standing in front of a large screen with people walking around

Benchmark administrators around the world gave a sigh of relief following the European Union's decision to extend the deadline for its regulation surrounding benchmark indexing.

The law, BMR, was introduced following the significantly large volume of indices being introduced to the market as well as the Libor and Euribor scandals where banks were manipulating their credit worthiness.

The transitioning period was initially set on 1 January 2018. The implementation of BMR means index providers, both inside and outside of the EU, must comply with several factors before it can be used as a benchmark by investment products, including ETFs. The extension was required due to index providers not being ready to be fully compliant with the regulation as well as the outcome of Brexit still being undetermined.

The purpose of the regulation is to protect investors by forcing the benchmark index to improve its governance, become more transparent and have a clear methodology in place. This means "2-man band" index providers will no longer be able to offer their products as benchmarks, according to Tobias Sproehnle, founder and CEO of Moorgate Benchmarks.

Sproehnle spoke with ETF Stream to discuss the need for BMR as well as the reasoning for the extension. He has over a decade worth of experience within benchmark indexing and was CEO of Thomson Reuters Benchmarks, the first regulated benchmark administrator. Sproehnle is now the founder of Moorgate Benchmarks which offers recognition and endorsement for third country index providers which have been affected by BMR.

Not only are benchmark administrators being affected by the regulation but contributors such as Libor and benchmark users such as ETF issuers are also being affected.

Sproehnle says in addition to the Brexit deadline looming and index providers not being ready, there were three problems which soon started to emerge. Firstly, European index providers were more focused on the implementation of Mifid II last year which forced BMR to become a lower priority. Secondly, index providers outside the EU (third country benchmarks) which offer products inside the EU must also comply with the regulation, but this was even less of a priority for them. Finally, Libor and Euribor, the interbank offered rates for London and Europe respectively, were getting replaced by central banks.

Market participants have now been given more time by the EU to prioritise the BMR. Participants within the EU now have until January 1st 2020 and participants outside of the EU have until January 1st 2022 to complete the transition and ensure all of their benchmarks comply with the new regulation.

The Financial Conduct Authority has said it has planned to regulate between 150-200 index providers. ETF issuers will then have to declare if their benchmarks are fully regulated in all prospectuses, but this means more data is going to be required.

ETF data provider Ultumus plans to expand its data service to include relevant information such as whether the index is regulated, by who is it regulated and since when. This would enable ETF investors to crosscheck their portfolio with each underlying index for each ETF to ensure it is fully compliant with the regulation. This eliminates the need for the investor to contact and question each index provider.

Bernie Thurston, CEO at Ultumus, said to ETF Stream: "It was becoming very apparent that benchmark administrators needed more time for the transitioning period. This is the Brexit version of regulation. We are looking to expand our data offering to ensure all market participants can see whether the underlying index is regulated and improve the transparency of the ETF market."

Despite the extension of the BMR deadline, many UK-based index providers remain uncertain due to the government still yet to organise a deal for Brexit which is set for March 29th 2019. Sproehnle explains if a deal is agreed between the UK and the EU, all EU laws will be copied and pasted for the UK. However, in the case of a no deal Brexit, the UK would then become a "third country benchmark" and would have until the later date to complete the regulatory changes. The extension enables all market participants to wait for the outcome of Brexit first before making the mandatory changes.


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