Caught in the EU FINREG WAKE

Citi Custody & Fund Services – Caught in the EU FinReg Wake 7 6 Regardless of their location, asset managers must now add BMR compliance to their risk and control processes. INTERNATIONAL IMPLICATIONS The BMR has a direct impact on all non- EU benchmarks because EU financial firms can only use non-EU benchmarks if they have been approved by ESMA. Non-EU benchmark administrators have until 2020 to be granted approval by ESMA. There are three ways that a non- EU benchmark provider can be approved for use. Equivalence A non-EU benchmark’s country can be deemed to have equivalent regulations to the BMR. This will be a tough needle to thread because, currently, no other jurisdiction has regulated benchmark administrators in the same way. Endorsement An EU benchmark administrator can endorse the benchmark provided in a non- EU country. This may be a viable option for global benchmark operators that have operations in the EU. Direct Authorization A non-EU benchmark can seek direct authorization from an EU member state’s regulator. This would entail becoming directly regulated by the EU regulator, in addition to the non-EU benchmark’s home regulator. The UK’s pending withdrawal from the EU adds an extra dimension to the non-EU benchmark issue. When it leaves the EU, all UK-based benchmark administrators will need to seek authorization as a non- administrator. However, work cannot be done on this until the Brexit negotiations are completed. The industry must keep a close eye on developments and update their contingency plans accordingly. THE OUTSTANDING QUESTION One big question remains: How will non-EU benchmarks get approval from ESMA? All of the available routes to recognition have their challenges and, so far, a preferred option has not emerged. While 2020 is still a while a way; EU firms should pay close attention to developments and have a “plan B” ready, just in case their non-EU benchmarks fail to clear the equivalence bar. “Non-EU asset managers should ensure that any EU benchmark they use is BMR compliant and have a contingency plan in place.”