"The complexity of these rules means that plenty of smaller administrator firms – of which there are over 150 in the UK – won’t have the capacity to set up the frameworks alone."
Financial services regulatory consultancy Bovill has warned that hundreds of financial institutions which use and administer benchmarks could be fined a tenth of their revenues if they don’t comply with new EU Benchmarks Regulations coming into force on the 1st January.
The new rules, created in the wake of the Libor-fixing scandal, are intended to ensure robust governance of the benchmarks and indices used in financial services to price assets and measure the performance of investments in funds, underpinning investment funds, mortgages and financial trades.
According to Bovill, many firms subject to the new BMR are putting off compliance in the belief that it isn’t as urgent as Mifid II, and that both administrators and index users have a two-year transitional period.
Due to the complexity and widened scope of the rules, Bovill also believes many benchmarks administrators are unaware of the new regulations and that many smaller administrator firms lack staff capacity to put the structures required by the rules in place.
Additionally, some benchmark users have assumed that the two-year transition period applicable to EU benchmark administrators also applied to their obligations under the BMR.
However, on 15 December ESMA released an update to its Q&A document regarding the regulation, clarifying that they are indeed required to have those plans from 1st January 2018 onward.
Tobias Sproehnle, Benchmark Expert at Bovill, said: “Mifid II may be occupying most financial departments’ attentions for now. But the heavy penalties facing firms failing BMR make it essential that benchmark administrators have the internal systems in place to govern, control, monitor and record their processes. Additionally, the transitional period does not in fact apply to users, who must by 1st January be aware of the benchmarks they use, secure confirmation from their administrators that they are compliant, and put in place ‘robust written plans’ that detail their intentions in the event their benchmarks change or cease to exist.
“Not only would a failure to ensure compliance with the new BMR see benchmarks underpinning thousands of financial instruments, mortgages, funds and investments discontinued, but firms falling foul of the regulations could be docked a tenth of their global revenues.”
Gareth Parker, Benchmark Expert at Bovill, added: “The complexity of these rules means that plenty of smaller administrator firms – of which there are over 150 in the UK – won’t have the capacity to set up the frameworks alone.
“Bovill has seen a rush of benchmark administrators looking to ensure they are ready to apply for authorisation or registration early in 2018. As a result, clients may soon look askance at administrators who have not achieved compliance, despite the transition period available to administrators. Additionally, it is now clear that benchmark users will have regulatory exposure from 1st January 2018 until they have completed their robust written plans – which our experience shows are not simple to create. Administrators and users should urgently seek advice on how they can meet the new regulations in time to be compliant by the end of this year, to avoid the spectre of regulatory censure.”