EU Benchmark Regulation and what it means for financial participants in Asia Pacific

Many financial participants have been so busy with MIFID II that they haven’t understood the impact of the EU Benchmark Regulation, or “EU BMR”, which came into effect on 1st January 2018, and will prohibit EU entities from using an unregulated benchmark in the EU from 1st January 2020.

Who does this impact?

Unlike most recent regulations or principles around benchmarks, EU BMR also regulates contributors and users of benchmarks and indices in addition to Administrators such as Thomson Reuters. This means that a large number of market participants need to understand the level of exposure they have to this regulation.

What does BMR regulate?

Only benchmarks or indices provided by an approved administrator or by a central bank can be used within the EU and for the vast majority of well known benchmarks this comes into force on 1^st January 2020. Providers and users of unapproved benchmarks can be subject to fines.

Like benchmark providers, contributors will have to apply for authorization/registration. The aim is to ensure data provided by the contributor is subject to robust checks to avoid conflict of interest.

ESMA provides a list of Benchmark Administrators and benchmarks which are approved and can be used on their website https://www.esma.europa.eu/benchmarks-register.

What about Thomson Reuters administered benchmarks and indices?

Thomson Reuters dedicated benchmark subsidiary, TRBSL, is currently regulated by the UK regulator, the FCA. Prior to the BMR’s introduction, TRBSL was one of the few regulated benchmark administrators.

Thomson Reuters is in the process of applying to be authorized by the FCA under EU BMR. and we expect to be among the first major benchmark administrators to be authorized. As well as the WM/Reuters 4pm London Spot price, TRBSL currently administers our CDOR and CORRA Canadian interest rate benchmarks, and the Saudi Arabian SAIBOR – which are included in our application. Our objective is to cover other benchmarks and indices by the TRBSL governance structure, based on their significance in the EU. We expect this process to finish by the end of the transition period on 1 Jan 2020. The latest update on our implementation plan is available here, and we will continue to provide updates as our application and plans progress:

Why does this matter for clients in Asia Pacific?

We expect some banks to stop using non-approved benchmarks well before 1st January 2020.

• Local and regional banks that use benchmarks as the underlying of transactions (e.g. swaps or other derivatives) should ensure they are authorized under EU BMR, especially if their counterpart is in the EU
• Index providers and exchanges in Asia Pacific may struggle to sell their indices to EU clients or risk averse banks if they do not get them authorized in the EU
• Administrators of interest rate benchmarks such as treasury/banking associations will not be able to distribute their benchmarks to EU users or to risk averse banks even before 1 January 2020
• Although central banks are exempt from EU BMR regulation, investment flows and trade can be negatively impacted if benchmarks that are administered by other entities in their jurisdiction cannot be used by a large number of global users
• New benchmark administrators will not have been able to license their indices or benchmarks to the EU starting 1 January 2018

What do users and providers in Asia Pacific need to know?

If they have not done so already, users of benchmarks should compile an inventory of all the benchmarks and indices they consume. They then need to understand which benchmarks and indices are directly exposed to the EU BMR and are used for the basis of financial instruments (swaps, derivatives, ETFs and other structured products) and also transactions.

Once this is understood, users need to assess their risks related to the benchmarks that are affected by EU BMR:

1. Certain benchmarks or indices may be discontinued because the current administrator may not receive EU Authorization or, for non-EU benchmarks, Recognition; or may choose to exit the business due to the cost and complexity associated with the EU BMR approval process
2. In some cases, users of a benchmark are also contributors to it and this conflict of interest needs to be managed internally and code of conducts need to be provided

It is therefore very important that users engage with their benchmark and index providers (both EU and non EU based) to ask them what their plans are regarding the EU BMR and the indices and benchmarks they administer.

Benchmark and Index administrators should study the regulation and understand how to be compliant with this regulation. This involves the following options:

• Rely on Equivalence: only applies if benchmark is regulated locally (in Asia Pacific only likely to be Australia and Singapore before 2020, and will only apply to a handful of critical benchmarks in those jurisdictions) and the regulation is deemed equivalent by ESMA
• Apply to be a Recognised non-EU administrator: requires at least a legal representative in the EU, who also has oversight of the benchmark and significant cost and time implications for an application
• Be Endorsed by an approved EU administrator, which effectively takes on all the regulatory risk of the non-EU administrator and needs to have full oversight of the non-EU Benchmark
• Mandate an EU Benchmark Administrator such as TR to administer the benchmark on their behalf. This may involve giving up some degree of control over the benchmark, as well as the calculation of it. TR offers benchmark administration services and we can work with clients to find a solution with them.
• Any of these options will involve a lot of time and cost and potentially change the way their benchmarks/indices are managed. We understand that the application and review process for non-EU administrators could take a significant amount of time, due to the current number of applications being submitted for authorization

How can Thomson Reuters help clients?

For all users of Thomson Reuters administered benchmarks, we will provide details of which benchmarks we plan to make EU BMR compliant over the coming months by posting details on our website. Any further questions about specific benchmarks can be directed to benchmarks@tr.com.

For benchmark and index administrators, we are happy to discuss and share experiences and best practises as well as potential partnerships to ensure their benchmarks/indices can continue to be used in the EU.

As a provider of trusted answers, Thomson Reuters has long been committed to publishing independent and transparent benchmark rates which are designed to be reflective of the markets.

Info and events to look out for

Thomson Reuters held seminars to further discuss this in Singapore and Sydney with a number of industry experts. We will be organising further events in Hong Kong and Tokyo in April.

Thomson Reuters designs, calculates, governs and publishes financial benhcmarks that lie at the heart of the global financial systems. Find out more about our offerings.

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