Whilst the EU Benchmark Regulation (“BMR”) came into effect on 1 January 2018 many benchmark, users have not fully assimilated the impact of the BMR on their business. Firms may have concluded that they would not be impacted by the BMR, simply because they are not benchmark administrators¹ . However, unlike the IOSCO Principles for Financial Benchmarks, the BMR also impacts benchmark users.

Am I a benchmark user?

To determine whether you are a benchmark user, ask yourself the following:

• Do I manage financial products / contracts (“products”) that reference indices?
• Are these products registered for distribution within the European Economic Area (EEA)?

If you have answered both questions affirmatively, you may be a benchmark user. Even if your firm is located in the EEA but only offers products outside of the EEA, you may be impacted and should continue reading.

However, there is still a chance that you are not impacted. Only certain products are in scope of the BMR. The list of products essentially follows the definition under MiFID II. To list only the most common: UCITS² , AIFs³ , structured products, derivatives, and certain credit agreements.

In combination with the distribution and the type of product, the use of the index will then determine whether you are impacted by the BMR. If you use an index to

• determine the amount payable under a financial instrument or contract, or the value of a financial instrument; or
• measure the performance of an investment fund for the purpose of tracking the return, defining the asset allocation, or computing the performance fees,

you are a benchmark user and you have to comply with various requirements on contingency measures, control framework enhancements, and disclosures.

Accordingly, the mere holding of products that reference an index, and, in case of investment funds, referencing a benchmark for mere performance comparison or marketing purposes (e.g., factsheet) does not constitute benchmark usage.

I am a benchmark user. What do I need to do?

1. Benchmark Compliance

Benchmark users must ensure that they only use benchmarks that are provided by benchmark administrators included in the ESMA Benchmarks Register⁴ , or that benefit from the transitional provisions until 31.12.2019.

How can you achieve compliance?

1. Assess all your products to determine which of them are in scope of the BMR.
2. For in-scope products, determine the index providers and assess whether they are included in the ESMA Benchmarks Register or benefit from the transitional provision. Often, index providers publish information on their compliance status or intention to become compliant on their website. In case of doubts, you should contact your index provider.
3. Establish controls around the use of benchmarks to ensure that only benchmarks provided by BMR compliant administrators are used.

Illustration 1: How to determine whether an index provider benefits from the transitional provisions under the BMR

2. Contingency measures

In essence, benchmark users are required to implement the following contingency measures:

1. Benchmark users must produce and maintain robust written plans setting out the actions they would take if the benchmark materially changes or ceases to be provided.
2. If feasible and appropriate, benchmark users must also select at least one alternative benchmark as a substitute and provide a justification for the selection.

How can you achieve compliance?

1. Establish a written benchmark contingency plan, which will have to be provided to a regulator upon request. It is not an option to rely on the benchmark administrator’s contingency measures.
2. Define alternative benchmarks and ensure that you have received the sign-off from the responsible product owners in your firm. We recommend that alternative benchmarks are selected from BMR compliant administrators that are different from the provider of the original benchmark.
3. Establish a process to ensure that whenever a new product is launched or a benchmark is changed, an alternative benchmark is defined.
4. Enhance your UCITS and AIF prospectuses with a disclosure on contingency measures. (Refer to section 3 for timeline).
5. Establish controls to periodically review the suitability and BMR compliance of the selected alternative benchmarks.

If a benchmark administrator terminates a benchmark or changes the methodology, we recommend to reassess the suitability of the alternative benchmark and if necessary, select a new one. In general, you do not need to have a license for your alternative benchmarks, as long as they are not used.

3. Benchmark Disclosure

Benchmark users must add a disclosure to the relevant product prospectuses, stating that the benchmark is provided by an administrator included in the ESMA Benchmarks Register or benefits from the transitional provisions. However, benchmark users are not required to publish benchmarks in their prospectuses that have not been disclosed previously.

The following documents need to be updated within the set timeline:

1. Until 1.1.2018: Prospectuses of securities that are offered to the public or admitted to trading⁵;
2. At first occasion or latest until 31.12.2018: UCITS prospectuses⁶.

Illustration 2: Applicable timeline for updating fund prospectuses

Interestingly (and inconsistently), the BMR only requires adding the disclosure to UCITS prospectuses, but not to AIFs. Moreover, KIIDs, PRIIPS, or any marketing material (e.g. fund factsheets or client reporting) are out of scope.

To achieve compliance, you should update your product prospectuses with the said disclosure.

4. Notification

Benchmark users that qualify as market operators in regulated markets or that are operating an MTF⁷ or OTF⁸ , must include the name of the referenced benchmark and its administrator in their notification to the competent authority of the trading venue of any financial instrument for which a request for admission to trading is made.

When should I be compliant?

Benchmark users have to comply with the BMR since 1.1.2018.

What if I am not a benchmark administrator or user?

You may have determined that you are neither a benchmark administrator nor a user. We still recommend checking whether you are a data contributor or an outsourcing partner to a benchmark administrator. This would trigger additional requirements.

Last but not least, the BMR will not be the last regulation on financial benchmarks. The Monetary Authority of Singapore is also expected to introduce regulation on financial indices. A first consultation paper was already published in June 2013.

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¹In case you are a benchmark administrator, you may want to read our previous Deloitte blogpost on the BMR: EU Benchmark Regulation: Are you ready for implementation?
²Undertakings for Collective Investments in Transferable Securities
³Alternative Investment Funds
⁴The ESMA Benchmarks Register can be found on https://www.esma.europa.eu/benchmarks-register.
⁵Pursuant to Directive 2003/71/EC
⁶Pursuant to Directive 2009/65/EC
⁷Multilateral Trading Facility as defined under MiFID II
⁸Organised Trading Facility as defined under MiFID II