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Council Publishes First Compromise Proposal on Benchmark Regulation

The Italian Presidency of the Council of the EU has published a compromise text relating to the Proposal for a Regulation of the European Parliament and of the Council on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds. The compromise text was published on 10 September 2014 and proposes amendments to the Commission’s initial proposal published in September of last year.

Governance and Control

One of the key proposals by the Council is to strengthen the governance and control requirements applicable to all benchmark administrators including by providing that appropriate procedures must be followed where conflicts of interest arise. The provision of a benchmark will have to be operationally and functionally separated from any part of the benchmark administrator’s business that may create an actual or potential conflict of interest.

Independent Oversight

The compromise text also expands upon the requirements applicable to the independent oversight function which must be established by benchmark administrators and expands significantly on both the control framework and accountability framework requirements in addition to those relating to record-keeping and outsourcing.

Code of Conduct

The compromise text adds to the content requirements applicable to the Code of Conduct that must be developed by benchmark administrators in respect of each benchmark (or each ‘family of benchmarks’) and to which the contributors of the benchmark’s input data will be required to comply. The content of the benchmark statement required to be published by benchmark administrators in respect of each benchmark (or each ‘family of benchmarks’) is also further clarified.

Robust and Reliable Methodology

The compromise text proposes that the methodology for benchmarks must take into account factors including:

  • The size and normal liquidity of the market
  • The transparency of trading and the positions of market participants
  • Market concentration
  • The adequacy of any sample to represent the market or the economic reality that the benchmark is intended to measure

The administrators of critical benchmarks will also need to submit a bi-annual assessment of the capability of the benchmarks “to measure the underlying market or economic reality” and will be required to appoint an independent external auditor.

Registration v Authorisation

Administrators of benchmarks based on input data provided by regulated venues, and other similar sources which makes them less vulnerable to manipulation, will only need to be “registered” – as opposed to being “authorised”. Registration will take 15 days instead of 60 for authorisation.

Next Steps

Following agreement and adoption at EU level, the Benchmark Regulation will be published in the Official Journal and will come into force the following day. However, it will not become effective until 12 months thereafter with the exception of provisions relating to the establishment of a list of critical benchmarks which will come into effect 6 months thereafter.

The compromise text can be found here.

Contributed by James Phelan