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Benchmark compliance shifts up a gear: the EU Benchmarks Regulation enters into force

The EU Benchmarks Regulation (the BMR) was published in the Official Journal on 29 June 2016 and most provisions will apply from 1 January 2018. While the BMR will have a significant impact on the administration of many interest rates and other well-known market benchmarks, a wide range of other levels or values used in normal market transactions will also need to be treated as benchmarks. 

Allen & Overy has followed the national, regional and global evolution of benchmark regulation and is advising a wide range of clients on implementation and compliance.

The road to benchmark reform

Benchmark reform has been high up the regulatory reform agenda since the scandals involving the "IBORs", benchmarks for foreign exchange and commodities. National and industry group first-response reforms (eg to LIBOR) led to the International Organisation of Securities Commissions (IOSCO) publishing its Benchmark Principles and both of these have contributed to the BMR. Politicians and regulators have grappled with questions of scope and how to govern the many different benchmark levels in the market. Given the diversity of national and asset-based markets it is not surprising that many benchmark levels have evolved differently. 

Importantly, the IOSCO Benchmark Principles include the concept of "comply or explain", allowing benchmark administrators to apply proportionality to requirements that may not reflect the nature of the benchmarks for which they are responsible. The BMR has included this principle, but only to a limited extent.

What will we see?

We expect to see the following trends continue this year:

  • Compliance with IOSCO Benchmark Principles: Several Member State regulators, including the UK Financial Conduct Authority (FCA), have made clear to supervised firms that they require compliance with the IOSCO Benchmark Principles in relation to a firm's businesses. See, for example, the FCA's Thematic Review of Financial Benchmarks, July 2015. In some cases, investors are reported to be looking for IOSCO compliance before investing in products linked to relevant benchmarks or indices.
  • Preparation for the BMR: Many institutions have already begun to identify relevant in scope levels and prices for which they act as an administrator or contributor. Where this has not already happened, we expect to see these reviews expanded to address relevant changes needed to ensure the policies, procedures and practices of a business will comply with the requirements of the BMR. This is a significant exercise, particularly as it will affect many existing levels.
  • Business reviews: We expect an ongoing focus by institutions on their index businesses, with some benchmark businesses being sold and roles being outsourced.

Important features of the BMR:

  • The BMR is intended to provide "a preventive regulatory framework" for the administration of benchmarks used in the EU. This is a maximum harmonisation regime and will have direct effect in each Member State. Existing provisions in national law, the Market Abuse, MiFID, UCITS and Prospectus Directive regimes all have some benchmark requirements but are seen as piecemeal.
  • The definition of a benchmark is widely drawn. It will capture many levels not traditionally thought of as a benchmark, including potentially many index levels, portfolio levels and basket levels, as well as some reported prices that the market relies on from different data providers. See "When is a level a BMR Benchmark?" below.
  • There are many provisions in the BMR to ensure publication of key points for the benchmark and transparency as to benchmark processes.
  • The BMR imposes qualitative requirements on the benchmark in many cases. As well as significant rules on conflicts of interest, benchmark oversight and control and accountability frameworks, the BMR requires that input data shall be "sufficient to represent accurately and reliably the market or economic reality that the benchmark is intended to measure". The BMR requires the benchmark to be reviewed and, if necessary, modified where it is not sufficiently robust or fails to meet requirements of the BMR. Benchmark users must be consulted on material changes to a benchmark. This will be significant for many existing benchmarks.
  • There is only limited grandfathering within the regime. There are potentially complex transitional provisions to allow both EU and non EU administrators a grace period to apply for authorisation or registration (for EU administrators) or achieve equivalence, recognition or endorsement (for non EU administrators). The transitional provisions potentially run up until 1 January 2020 but some ambiguous text in the BMR means that this may only benefit benchmarks that are already in use in the EU at 30 June 2016. This point has been made to ESMA in response to its May 2016 BMR Consultation Paper.
  • The BMR places significant burdens on a wide range of EU regulated and supervised entities. In particular, supervised entities can be required to contribute to Critical Benchmarks and are only able to "use" a benchmark that complies with the regime. Issuing, or being a counterparty to, an index-linked financial product, or using an index to determine the performance of an investment fund (a UCITS or AIF), can count as relevant uses of a benchmark. This restriction on the use of a benchmark gives teeth to the BMR.
  • Supervised entities are also required to have "robust written plans" setting out actions they would take where a benchmark is materially charged or is cancelled. It is unclear how this requirement may interact with existing product terms.
  • There are only limited exemptions from the BMR. In some circumstances these can include a central bank or public authority, central counterparties, entities providing single reference prices, the press, an entity publishing its own borrowing rates and certain smaller commodity benchmarks.
  • ESMA will maintain a register of benchmark administrators, and the BMR requires a high degree of co-ordination between EU regulators. For Critical Benchmarks, a college of regulators will be formed.
  • The BMR includes requirements for fair and non-discriminatory access to Critical Benchmarks, for example in relation to licensing arrangements.

Third country administrators

Third country administrators are in a difficult position. The BMR allows the Commission to adopt equivalence decisions in relation to certain third countries or specific benchmarks but this is a complex and time-consuming procedure. Given that the EU is leading the way in benchmark regulation, it is unclear if this will be possible.

As a holding measure, an administrator from a third country may apply for prior recognition by an EU competent authority (the EU "Member State of reference" determined following a procedure in the BMR) if it complies with all key requirements of the BMR (subject to certain limited exceptions). There is a clearer acknowledgement of IOSCO Benchmark Principles compliance provided "that such application is equivalent" to the BMR, with only limited carve outs.

Finally, third country benchmarks may be endorsed by a connected EU supervised entity. The endorsing entity must have significant responsibility for the third country administrator, a close involvement with the benchmarks and the benchmarks must fulfil requirements "at least as stringent" as the BMR.

When is a level a BMR Benchmark?

A key perimeter issue for any business is to apply the BMR definition of a benchmark to each 

potentially in-scope level. There is both an index trigger (see (1) and (2) below) and a product trigger (see (3) below). If each of points (1), (2) and (3) below are satisfied, then a level will be in-scope unless an exemption (see (4)) applies. Please contact us to discuss in more detail how this affects your business.  

Benchmark Determination Step

1. Level 





Is the level a figure:

- that is regularly determined, entirely or partially, by the application of a formula or any other method of calculation, or by an assessment; and

- where this determination is made 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?

2. Publication




Is the level "published or made available to the public"?  This is an important Level 2 work item for ESMA. The ESMA Consultation Paper of 27 May 2016 proposes that this may be satisfied where "the index is accessible by a large or potentially indeterminate number of recipients…". More detail applies and at this moment this lacks clarity.

This publication requirement plus the text under Level above make up the "index" definition.

3. Financial Instruments



Is the level a level by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument is determined or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees? (See Relevant definitions below).

4. Exemptions



Is the administrator of the level a central bank, public authority, central counterparty providing reference prices or settlement prices used for CCP risk management purposes and settlement, providing a single reference price for any financial instrument, press or other media, or publishing a borrowing rate? More detail applies.

Relevant definitions






"financial instrument" is defined as any of the instruments listed in Section C of Annex I to MiFID II for which a request for admission to trading on a trading venue (as defined in MiFID II, ie a regulated market, MTF or OTF) has been made or which is traded on a trading venue or via a systematic internaliser (as defined in MiFID II). To include financial instruments traded via a systematic internaliser makes the scope of financial instruments potentially much wider.

A "financial contract" is narrower and is essentially limited to consumer credit and mortgage agreements.

An "investment fund" is a UCITS or an AIF. 


Legal and Regulatory Risk Note