Third country benchmark administrators will need every bit of the additional time granted for BMR compliance to ensure their benchmarks get approved, say PwC’s Gregory Campbell and Daniela Bunea.
The February extension of the transitional period under the EU Benchmarks Regulation (BMR) until the end of 2021 was positively received by both third country administrators and their European users. It is hoped that it will enable all required benchmarks to become fully approved by 2022, thereby minimising disruption to users who would otherwise have had to frantically replace thousands of non-EU benchmarks in the run-up to the initial 2020 deadline.
The disruption and market turmoil would have been extensive, and while a reprieve has been granted, administrators must not sit back and do nothing. It is easy to underestimate the duration and complexity of the approval process and it is likely that most administrators will need every bit of the additional time granted. At the time of writing, only three third country administrators have successfully been approved.
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Let us begin by highlighting that there are factors actually outside the control of individual organisations, which could change the organisation’s plans.
- Firstly, some third country administrators are expecting that the European Commission (EC) will determine existing and future benchmark regimes to be equivalent under BMR. If that happens, it would remove the need to apply for recognition/endorsement. But, and this is the crux of the matter, where such determinations are made, they will likely be limited to the few regulated benchmarks of systemic importance within that jurisdiction, leaving the majority of benchmarks still in need of approval via either administrator recognition or benchmark endorsement. At the time of writing, the EC has already publicly consulted on two draft decisions under BMR to consider the legal and supervisory benchmark frameworks of Australia and Singapore as equivalent to BMR. However, as a case-in-point, the equivalence is expected to apply to specific benchmarks (e.g. only SIBOR and SOR in Singapore).
- Secondly, in case of a no-deal Brexit, administrators with customers in both the UK and the EU27 may need to apply for approval in both jurisdictions, potentially having to meet (slightly) different requirements, and appointing legal representatives or endorsers in both.
- Finally, BMR itself may be subject to future changes. The EC was mandated to submit a report to the EU co-legislators on the operation of the BMR third country regime by April 2020. As part of this, it will assess whether the regime requires amending. For now, we know that the European Securities and Markets Authority (ESMA) will become the authority responsible for recognising third country administrators from 2022 onwards (national competent authorities, or NCAs, will continue being responsible for endorsement).
These factors demonstrate some of the ongoing challenges for administrators in defining an approach and executing on it. As a result, the sigh of relief earlier this year has proven to be short-lived. If anything, administrators are actually irked by yet another poorly defined and executed missive from Brussels. Of course, the most proactive of firms have spent blood, sweat and shiny pennies to comply with the original deadline – only to find themselves with the cost of regulation two years earlier than needed.
So what to do? And when? We do know that two and a half years will fly by and, we have a lot of first-hand experience that suggests all of that time will be needed. Here is our view of the key stages in the process from start to end, and a rough estimation of the duration of each phase.
This could well be the most challenging and time consuming for administrators. In order to perform an assessment whether, and to what extent, the administrator complies with each applicable BMR rule and/or IOSCO Principle, one must identify and gather relevant information and engage the relevant staff. The higher the number and/or complexity of benchmarks the administrator has in its portfolio, the more intensive this stage is likely to be.
Any gaps identified will require fixing. The remediation phase clearly will differ in intensity depending on the number and severity of gaps. Some gaps may be resolved quickly (e.g. adding content to a complaints policy), but others may be more complex (e.g. negotiating additional clauses in third party contracts in order to obtain and demonstrate sufficient oversight).
The IOSCO Principles require an administrator to have periodic independent audits conducted. The outputs of these can also be used in negotiations with prospective legal representatives and endorsers (potentially reducing their costs of due diligence), and also in the actual application for BMR approval. The audit report itself is recommended under BMR article 32(2) to demonstrate compliance with the relevant IOSCO Principles for recognition purposes. Providing all the documentation required by the auditor as swiftly as possible should in principle speed up the completion of this phase.
Legal Representatives and Endorsers
The administrator must appoint a legal representative or an endorser in the UK and/or another EU27 Member State. The legal representative has to be a natural or legal person based in the administrator’s EU Member State of Reference, whereas the endorser must be a BMR-approved administrator located anywhere in the EU, or any other EU supervised entity that meets certain conditions. More information on this can be found here.
There are a number of organisations and individuals offering these services – and they are getting busy! They will need to undertake a certain level of due diligence before accepting the legal and regulatory risk. Moreover, of course, the administrator must pay a fee for the service and agree to the governance and oversight criteria that the representative or endorser imposes (itself a BMR requirement).
Preparing and processing the application
After appointing the legal representative/endorser, the applicant must gather and prepare the documentation required for submitting its application. Commission Delegated Regulation 2018/1645 lists the information to be provided in the application for recognition. For endorsement, there is no prescriptive information published (yet) – largely because the individual endorser will define it.
Before submitting the application, it is highly recommended that the administrator engage with the NCA to clarify any issues it might have and make sure that it meets the expectations of the NCA. This will save the administrator precious time in the next phases. Some NCAs are requesting physical meetings.
After submitting the application, the NCA will raise questions and potentially make additional requests. The duration of this phase is difficult to estimate; it all depends on how satisfied the respective NCA is with the documentation submitted and/or preparedness of the administrator. It may also depend on the NCA itself! In our experience, it is a lengthy process and while the NCA has 90 business days to examine the application and adopt a decision, the clock will not start until the NCA is satisfied the application is ‘complete’.
Organisations have many competing priorities and finite resources. By breaking the requirements and stages down, it makes the process more manageable. Of course, the rules may change or evolve once, or even twice, over the next two years. While the minutiae may change, we can be certain that benchmark regulations in the EU, and emerging elsewhere, are here to stay.
We strongly advise third country administrators against unnecessary delays in at least their preliminary preparations to apply for approval in the EU. Any delay might impair their ability to service their customers in the EU or even elsewhere as similar benchmark regulations are developed in other jurisdictions.
Gregory Campbell is a PwC Director based in the UK, providing advisory and assurance services on financial benchmarks and indices. He leads PwC’s global response for third-country administrators under BMR. Daniela Bunea is a PhD Economist and Senior Associate in the PwC UK FS Regulatory Insights with expertise covering financial benchmarks, LIBOR transition and central clearing.