ISDA and certain industry associations have recommended reforms to the Benchmarks Regulation in EU. These industry associations are the Asia Securities Industry and Financial Markets Association (ASIFMA), the Futures Industry Association (FIA), and the Global Foreign Exchange Division of the Global Financial Markets Association (GFMA). The proposed recommendations would ensure the highest standards of governance and transparency apply to benchmarks that pose systemic risk, while enabling EU firms to continue accessing the non-systemic benchmarks they rely on to manage their day-to-day exposures. A key component of the recommendations is to narrow the scope of the Benchmarks regulation.
An estimated 2.96 million benchmarks are in use globally, the majority of which pose no systemic risk. However, a general prohibition on use within the Benchmarks Regulation means none of these benchmarks can be used by EU investors, unless they comply with the regulation. While many EU critical benchmarks have now complied with the Benchmarks Regulation, a complex, costly, and burdensome third-country benchmark regime means there are concerns that many overseas benchmarks are unlikely to qualify, barring them from use in EU after the end of the transition period on December 31, 2021. The prohibition of potentially large numbers of benchmarks would result in EU investors being unable to manage risks that arise as a result of their business activities and could even pose a threat to financial stability, the associations say. The recommendations include the following:
- Allow benchmarks to be used in EU unless specifically prohibited (that is, a reversal of the current general prohibition of benchmarks unless specifically authorized)
- Provide designatory powers to an appropriate central authority (such as EC or ESMA) to mandate compliance for the EU and third-country benchmarks that are most systemically important to investors in EU
- Allow third-country administrators to obtain authorization from an appropriate central authority (such as EC or ESMA), or to qualify via equivalence, or via reformed endorsement or recognition processes, each within a fixed period of time
- Exempt EU non-significant benchmarks and their equivalent third-country benchmarks from mandatory designation
- Consider exempting EU significant benchmarks and their equivalent third-country benchmarks from mandatory designation, to better align the Benchmarks Regulation with the scope of benchmark regulations globally
- Exempt public policy benchmarks (for example, foreign-exchange rates used in non-deliverable forwards and certain interest rate swaps) and regulated data benchmarks
- Provide a voluntary labeling regime to allow administrators to comply with the Benchmarks Regulation and market their benchmarks as Benchmarks Regulation-compliant
- Provide regulators with the power to prohibit the acquisition of new exposure to benchmarks that fail to comply with the Benchmarks Regulation, but permit the use of such benchmarks for managing or reducing legacy positions
- Provide end-users with enhanced visibility on whether third-country benchmarks have qualified (or been disqualified) for use under the regime via a more usable ESMA register
According to a statement by the ISDA Chief Executive Officer Scott O'Malia, the Benchmarks Regulation was established to meet an important objective—to avoid disruption and to protect EU investors from badly run or failing benchmarks. The recommended changes will help achieve that objective and the end result will be a proportionate regime that provides a robust safeguard against the failure of systemically important benchmarks, while creating a level playing field for EU investors.
Keywords: International, Europe, EU, Banking, Securities, Benchmarks Regulation, Governance, Systemic Risk, ASIFMA, FIA, GFMA, Third Country Benchmarks, EC, ESMA, ISDA
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Previous ArticleBCBS Amends Guidelines on Sound Management of AML/CFT Risks
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.