In the financial industry benchmarks (e.g. LIBOR and EURIBOR), determine the price of many instruments. In the wake of their alleged manipulation, new rules have been adopted to improve the governance of benchmarks produced and used in the EU for financial instruments such as bonds, shares, futures and swaps. The Benchmark Regulation is designed to improve controls over the benchmark processes and improve the quality of input data and methodologies used by administrators. Only financial instruments that are admitted to trading are included for the purposes of this regulation. Further, national regulatory authorities are given wide powers of supervision, investigation and sanction. The regulation would come into effect by 1 July 2018.
As with all EU regulations, the impact of the regulation cannot be ascertained till the Level 2 process is completed. The European Commission (EC) seems to have adopted a more prescriptive approach than other regimes. However, the objectives of the regulation are essentially the ones set forth in the IOSCO Principles for Financial Benchmarks. Some benchmarks, however, may not prove strong enough to meet these new standards. When administrators fail to gain authorization or registration in the EU, the benchmarks could become inapplicable. Users are suggested to ensure that they are aware of the benchmarks they use and seek assurance from the administrators for those.
Author: Rob Voster