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    ISDA and Industry Associations Recommend Benchmark Reforms in EU

    July 02, 2020

    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. 


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    Keywords: International, Europe, EU, Banking, Securities, Benchmarks Regulation, Governance, Systemic Risk, ASIFMA, FIA, GFMA, Third Country Benchmarks, EC, ESMA, ISDA

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