The European Union announced on 14 July 2023 that it is extending the transitional period during which its third country regime requirements are disapplied.

Detail

The transitional period was due to expire at the end of this year. It has been extended to 31 December 2025. The two-year stay of execution is the last possible extension that the EU is permitted to grant under the existing level 1 framework.

Once it comes into force, a benchmark administrator will be required to use one of the “third country access routes” in order for EU supervised entities[1] to continue to use[2] its benchmarks beyond 31 December 2025[3].

Article 29(1) of the BMR states that a supervised entity may use a benchmark[4] or a combination of benchmarks in the Union if the benchmark is provided by an administrator located in the Union and included in the register … or is a benchmark which is included in the register.

Since 1 Jan 2022, ESMA supervises recognised third-country benchmark administrators and maintains the register of such third-country administrators. The BMR has been subject to a transitional period that has permitted EU supervised entities to use a third country benchmark until 31 December 2023, without the administrator having gone through one of the “third country access routes”.

There was a power for the Commission further to extend this period until 31 December 2025 in a delegated act to be adopted by 15 June 2023, if it provides evidence that this is necessary in a report to be presented by that time. The report has been issued, albeit past the deadline.

The three “access routes” are equivalence, recognition or endorsement.

• Equivalence – this involves ESMA declaring that the third country benchmark administrator’s home jurisdiction is subject to an equivalence decision. Only two countries have to date been declared equivalent – Singapore and Australia.
• Recognition – this involves an application to a member state and having a legal representative in that member state.
• Endorsement – this involves using an endorsing entity located within the EU to endorse that the third country benchmark administrator has met certain criteria, including that the third country benchmark administrator is subject to requirements that are as stringent as the BMR, and that the endorsing entity will monitor the activity of the BMR.

Commentary

There remains a significant lack of preparedness amongst benchmark administrators for the third country requirements. ESMA published information stating that, whilst the official ESMA register lists only 13 non-EU administrators and only about 20,000 non-EU benchmarks that can be used in the EU, commercial databases suggest there may be as many as 262 administrators from third countries that are not yet registered in the EU, providing a total of around 3.6 million benchmarks.

The third country access routes of recognition and endorsement are potentially expensive and administratively burdensome. Whether a firm will seek compliance through those routes depends on the economic interest the EU market represents to them. Equivalence remains the most appealing route, but it is a highly politicised issue – a number of commentators have suggested that the UK is highly unlikely to be granted equivalence, despite the legal regimes remaining extensively aligned post-Brexit. The EU’s benchmark regime has gone much further than most other jurisdictions – there is a real risk of the EU rendering itself uncompetitive in comparison to other countries, as acknowledged in the report which accompanied the announcement. The report hints at a review of the regime in the future – it will be interesting to see whether the scope of the BMR is paired-back, and whether the third country access routes survive.

[1] “Supervised entities” means a number of different types of financial market participant as defined in the relevant European legislation, including investment firms as defined in MiFID, market operators as defined in MiFID, CCPs as defined in EMIR, and administrators as defined in the BMR.

[2] ‘Use of a benchmark’ means: (a) issuance of a financial instrument which references an index or a combination of indices; (b) determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices; (c) being a party to a financial contract which references an index or a combination of indices; (d) providing a borrowing rate as defined in point (j) of Article 3 of Directive 2008/48/EC calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference in a financial contract to which the creditor is a party; (e) measuring the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio, or of computing the performance fees.

The definition of “financial instrument” includes the MiFID financial instruments – see footnote 6 regarding Section C of Annex I above.

[3] This date remains to be confirmed – see below.

[4] “Benchmark” under the BMR means any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees.