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Benchmarks Regulation

The Benchmarks Regulation introduces a regime for benchmark administrators, contributors and users of benchmarks in order that the accuracy and integrity of benchmarks is ensured. The AFM is responsible for the authorisation, registration and ongoing supervision of compliance with the Benchmarks Regulation in the Netherlands. The Benchmarks Regulation entered into force on 30 June 2016 and came into effect on 1 January 2018.

What is the focus?

The Benchmarks Regulation has the following objectives:

  • improving governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately
  • improving the quality of input data and methodologies used by benchmark administrators
  • ensuring that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest
  • protecting consumers and investors through greater transparency and adequate rights of redress.

The Benchmarks Regulation will introduce among others requirements with respect to:

  • the governance of and control by administrators over the benchmark process
  • ensuring that administrators avoid conflicts of interest and have policies and procedures how to manage them adequately
  • the input data used for determining a benchmark
  • the methodology used for determining a benchmark
  • the code of conduct that an administrator shall have in place for its contributors.

EU entity benchmarks administrators are required to apply for authorization or registration. In order to receive an application form, please contact the AFM via benchmarks@afm.nl.

What is an index?

The Benchmarks Regulation defines an index as any figure:

  • that is that is published or made available to the public
  • that is regularly determined:
    • entirely or partially by the application of a formula or any other method of calculation, or by an assessment; and
    • on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys.

What is a benchmark?

An index becomes a benchmark where the index is used:

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

The interest-rate benchmark transition

The interest-rate benchmark transition is the transition from traditional interbank interest-rate benchmarks (interbank offered rates, or IBORs) to new alternative interest-rate benchmarks. The best known IBORs are Euribor and Libor.

Financial market parties and their clients will be exposed to financial, operational and legal risks during the transition. A clustering of these risks could ultimately threaten the stability of the financial sector, due to the scale of use of these interest-rate benchmarks.

It is thus important that market parties prepare adequately for the transition to alternative benchmarks. Together with DNB, the AFM is monitoring progress by market parties in this respect closely. The AFM is also following the reform of interest-rate benchmarks around the world.

The reforms of Euribor and Eonia are the most important for the Dutch market. Euribor was successfully reformed in 2019. The manager European Money Markets Institute has been included in the ESMA Benchmarks Register. Since 2 October 2019, Eonia has been linked with the €STR (Euro Short-Term Rate) benchmark, and will cease to exist after 1 January 2022.

The European Working Group on Euro Risk-free Rates publishes guidance, standards and references for market parties during the transition. More information on the €STR and the Europese Working Group on EU Risk-free Rates is available here (the ECB website).

Importance of preparing for the transition

The AFM and DNB have publicly drawn the attention of market parties to the importance of preparing for the transition period on various occasions:

  • On 24 April 2019, the AFM and DNB published a letter to the CEOs of selected financial enterprises, calling on the parties to prepare for the transition in good time and to report on their progress. The supervisors then published feedback at aggregate level.

     

  • On 10 October 2019, the AFM included the IBOR transition in its Trend Vision 2020. This is an annual publication in which the AFM looks ahead and identifies the risks and potential problems in the coming year.

     

  • On 15 June 2020, the AFM and DNB started a semi-annual survey of a group of financial enterprises to enable the supervisors to monitor developments and progress with respect to the transition and to identify risks in good time. The supervisors expect to publish an initial feedback at the end of 2020.

For information on the transition in other jurisdictions or other interest-rate benchmarks, see the table below:

 

EU

UK

USA

Japan

Switzerland

IBOR

Euribor, EONIA, Euro Libor

GBP Libor

USD Libor

JPY Libor

CHF Libor

Alternative index

Euro Short-Term Rate (€STR)

Sterling Overnight Index Average (SONIA)

Secured Overnight Financing Rate (SOFR)

Tokyo Overnight Average Rate (TONAR)

Swiss Average Rate Overnight (SARON)

Manager

European Central Bank

Bank of England

Federal Reserve Bank of New York

Bank of Japan

SIX Swiss Exchange

Working group concerned

Working Group on Euro Risk-free Rates

Working Group on Sterling Risk-free Reference Rates

Alternative Reference Rates Committee

Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks

National Working Group on Swiss Franc Reference Rates


Which parties are affected?

The scope of the Benchmarks Regulation covers benchmark administrators, supervised contributors and benchmark users. You may qualify as a benchmark administrator if you provide indices that are used in:

  • financial instruments traded on trading venues or via systematic internalisers in the EU
  • mortgage or consumer credit contracts, or
  • investment funds (AIF or UCITS).

You may qualify as a supervised contributor if you are an authorised person and you contribute input data:

  • that is not readily available to the administrator, and
  • that is required for the determination of a benchmark determination and is provided for that purpose.

You may qualify as a benchmark user and be subject to additional requirements if you are supervised under one of the EU regulations as specified in the Benchmark Regulation and you:

  • issue a financial instrument which references an index or a combination of indices
  • determine the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices
  • are a party to a financial contract that references an index or a combination of indices
  • provide a borrowing rate 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
  • measure the performance of an investment fund through an index or a combination of indices for the purpose of (i) tracking the return of such index or combination of indices, (ii) defining the asset allocation, or (iii) computing the performance fees.

The Benchmark Regulation imposes requirements on benchmark administrators, contributors and users. If you are unsure whether you fall within the scope of the Benchmark Regulation, please contact the AFM via benchmarks@afm.nl.

How can a benchmark provider be approved?

If you are an EU entity providing benchmarks, the entity can be approved under the Regulation in two ways: authorisation or registration.

Authorisation is required if you provide:

  • critical benchmarks, or
  • commodity benchmarks or interest rate benchmarks and you are not a supervised entity, or
  • significant benchmarks and you are not a supervised entity.

You can apply for Registration in case:

  • you are a supervised entity, and
  • you do not provide critical benchmarks.

In order to receive an application form, please contact the AFM via benchmarks@afm.nl.

Requirements for benchmark users

The Benchmark Regulation (BMR) imposes requirements on benchmark administrators, contributors and users. AFM expects you to know whether your institution is a benchmark administrator, a contributor to benchmarks or a user of benchmarks. Different requirements apply to each. Users of benchmarks do not have to apply for a registration or license at AFM unless they also administrate benchmarks.

You may qualify as a benchmark user and be subject to additional requirements if you are supervised under one of the EU regulations as specified in the Benchmark Regulation and you:

  • issue a financial instrument which references an index or a combination of indices.
  • determine the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices.
  • are a party to a financial contract that references an index or a combination of indices.
  • provide a borrowing rate 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.
  • measure the performance of an investment fund through an index or a combination of indices for the purpose of (i) tracking the return of such index or combination of indices, (ii) defining the asset allocation, or (iii) computing the performance fees.

Benchmark users that fall within the scope of the BMR as mentioned above need to comply with specific requirements following from:

Article 28(2) BMR - Changes to and cessation of a benchmark
This implies that benchmark users need to have robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided. Where feasible and appropriate, such plans shall nominate one or several alternative benchmarks that could be referenced to substitute the benchmarks no longer provided, indicating why such benchmarks would be suitable alternatives. Upon request, the supervised entities shall provide the relevant competent authority with those plans and any updates. The plans need to be reflected in the contractual relationship with clients and are needed for contracts that are entered into from January 2018 or later.

Article 29 BMR – use of a benchmark
A supervised entity may use a benchmark or a combination of benchmarks in the EU if the benchmark is provided by an administrator located in the EU and is included in the ESMA register. Benchmarks are included in the ESMA register if they are provided by an administrator that has a BMR registration or license. Where a prospectus is published under the Prospectus Directive (2003/71/EC) or UCITS Directive (2009/65/EC) relating to transferable securities or other investment products that reference a benchmark, is the obligation of the issuer, offeror or person asking for admission to trade on a regulated market to ensure that the prospectus includes information on whether the benchmark is provided by an administrator included in the ESMA register.

Questions?

More information on the BMR can be found on the websites of AFM and ESMA. Should you have any questions after reading the BMR rules and the ESMA Q&A or if you are unsure whether you fall within the scope of the Benchmark Regulation, please contact the AFM via benchmarks@afm.nl.

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