Caught in the EU FINREG WAKE

5 4 Citi Custody & Fund Services – Caught in the EU FinReg Wake BMR: A Regulatory Spotlight on Benchmarks Regardless of their location, asset managers must now add European benchmark compliance to their risk and control processes. In response to several benchmark manipulation scandals, the EU’s Benchmark Regulation (BMR) came into force January 2018. The BMR sets a new global standard in the regulation of benchmarks by introducing strict guidelines for EU benchmark administrators, contributors, and users. The goals of the BMR are to improve governance over the benchmark process, mitigate conflicts of interest, and to improve the quality of data and methodologies used by benchmark administrators. Under the BMR, EU benchmark administrators must be authorized by their national regulators. The European Securities and Market Authority (ESMA) maintains a register of all authorized benchmark administrators in the EU. Existing EU benchmark administrators have a two-year transition period to apply for authorization or registration. However, they are expected to comply with the BMR while seeking authorization. ASSET MANAGEMENT IMPACT While the primary focus of the BMR is on the benchmark administrators, it also impacts EU asset managers and funds. If asset managers use an index to measure performance, set portfolio allocations, or calculate performance fees then it qualifies as a benchmark user. Under BMR, EU benchmark users are required to use only BMR compliant benchmarks. To comply with BMR asset managers must: 1. Have a process in place to track their benchmarks usage 2. Disclose in their funds’ prospectuses and offering documents that all appointed benchmark administrators are included on ESMA’s approved register 3. Maintain a written contingency plan in the event that a benchmark is no longer available While the BMR does not directly apply to non-EU asset managers, indirectly it impacts their risk management processes. Like their European counterparts, non-EU asset managers should ensure that any EU benchmark administrator they use is BMR compliant and have a contingency plan in place. Failure to so could result in non-EU asset managers losing access to a benchmark which could have serious implications for funds, such as the inability to measure performance or set portfolio allocations. SEAN TUFFY Head of Market and Regulatory Intelligence, EMEA, Custody & Fund Services