EU and UK Benchmarks Regulation – Third Country Regime
This note summarises the third country regime requirements under the UK and EU BMR, and gives information about the EU call for evidence on the scope and third-country regime under the EU BMR. With this review, the EU may be stepping back from the "cliff-edge” which the expiration of the transitional provisions on 31 December 2023 has created. This will come as a welcome relief for both third country benchmark administrators and European users of third country benchmarks. The EU’s call for evidence ends on 29 March 2023: all those affected may wish to consider responding if they haven’t already.
EU Review of the scope and third-country regime of the Benchmark Regulation
One of the major concerns with the EU BMR (Regulation (EU) 2016/1011) has been the rules on the use of non-EU benchmarks which will apply from 1 January 2024. The regime sets out three possible “access routes” for third country benchmarks to continue to be used by European users from next year: equivalence, recognition or endorsement. To date, the EU has only made equivalence decisions for Singapore and Australia[1]. For the UK, equivalence is a political football and unlikely to be forthcoming. The other two access routes, recognition and endorsement, are expensive and burdensome.
On 2 March 2023, the European Commission published a call for evidence, reviewing the scope and third-country regime of the EU BMR. The call for evidence notes that, while many major jurisdictions have implemented binding rules on the most relevant benchmarks, very few have regulated benchmarks as extensively as the EU. As a result, very few non-EU administrators have so far spent the necessary time and resources to obtain access to the EU market through recognition or endorsement, as this does not make economic sense for them.
In light of the wide use of third-country benchmarks in the EU, the Commission is concerned that, when the new rules come into force on 1 January 2024, EU market participants would be prevented from accessing many of the world's benchmarks. This would put them at a significant disadvantage compared to non-EU market participants. The Commission is considering ways to ensure that EU benchmark users continue to be able to use all relevant benchmarks provided outside the EU. It hopes that removing administrative requirements for most non-EU benchmarks used in the EU would reduce the burden for the administrators of those benchmarks. In addition, EU benchmark users would no longer have to check in the relevant ESMA register whether a specific non-EU benchmark has been approved for use in the EU.
The call for evidence is open until 29 March 2023 and the Commission has stated that it expects to publish revised rules in the second quarter of 2023.
UK BMR
Under the UK BMR, benchmark administrators located in the EU are exempted from the requirement to be approved by way of recognition or endorsement, and UK supervised entities can use their benchmarks freely, at least until 31 December 2025, which is the current end date for the UK’s “transitional period”. However, as matters stand, the UK's third-country regime would apply from that date, and EU and other third-country administrators and benchmarks would need to become approved by way of recognition or endorsement applications to the FCA, unless the relevant jurisdiction is declared equivalent. No doubt the FCA and the Treasury will be watching the EU’s call for evidence and subsequent rulemaking carefully. One option may be for the UK to follow suit. However, the cliff-edge of the transitional period is further away in time for the UK than the EU (end-25 rather than end-23), so we may not see anything happen very soon. UK law-makers and regulators already have a long to-do list, not least in light of the Wholesale Markets Review and the Financial Services & Markets Bill.
How can Cambitas help?
The author, Tom Hine, is an expert in wholesale financial services regulation, including the regulation of indices and benchmarks. Tom has sat on and chaired benchmark oversight committees, and has advised extensively on the BMR since it was first proposed after the financial crisis. Amongst other things, Cambitas can analyse and interpret regulations and respond to regulatory consultations. Tom also has a legal practice through Acuity Law.
[1] See https://finance.ec.europa.eu/system/files/2022-11/overview-table-equivalence-decisions_en.pdf
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