The European Commission published its long-awaited legislative proposal to amend the EU Benchmarks Regulation (EU BMR) on October 17, 2023. The proposal still needs to be reviewed by the European Parliament and the Council but, if adopted in its current form, it will (amongst other things):

• considerably reduce the scope of the EU BMR so that it only applies to critical benchmarks, significant benchmarks, CTBs, and PABs, and excludes non-significant benchmarks (benchmarks which do not breach a €50 billion ($53 billion) use threshold and are not otherwise found to be systemically important);
• restrict the provision of EU CTBs (climate transition benchmarks) and PABs (Paris-aligned benchmarks) to EU administrators; and
• increase the information available on the ESMA benchmarks register, making it a “golden source” of information for in-scope EU entities that want to use a particular benchmark.

There are no significant changes to the third-country regime. But, importantly, the narrowing of the scope to exclude non-significant benchmarks will mean that fewer third-country administrators need to use the existing approval routes.

Two key benefits

This brings two key benefits for EU benchmark users: first, a smooth transition following expiry of the existing transitional provisions at the end of 2025 (described below), and second, users of non-significant benchmarks will have greater flexibility in their choice of benchmark going forward.

The amendments are not intended to take effect until January 1, 2026. The current third-country benchmark transitional provisions are expected to expire on December 31, 2025, so the amended regime would take effect immediately thereafter. This should provide a smooth transition for EU entities currently using third-country benchmarks which would otherwise be prohibited in the EU after the end of 2025.

The amendments are expected to be finalized before the end of March 2024, but the exact timing will depend on the outcome of the trilogue process.

The Commission has also published a series of FAQs.

Why is the EU BMR being amended?

The proposed amendments are part of a wider EU strategy to reduce the regulatory burden on EU entities, and on EU SMEs in particular.

The reasons given by the Commission for the proposed changes are:

1. an overly broad scope that is disproportionately onerous for administrators of non-significant benchmarks; and
2. a cumbersome third-country regime that dissuades non-EU administrators from seeking approval for their benchmarks to be used in the EU, thus limiting the range of benchmarks available to EU supervised entities.

What are the proposed changes?

Various changes are suggested by the Commission. We discuss the key recommendations below.

De-scoping of non-significant benchmarks

The EU BMR categorizes benchmarks in various ways. One is according to usage in the EU, based on the total value of financial instruments, financial contracts or investment funds that reference the benchmark in the EU.

Benchmarks categorized in this way can be “critical” (EURIBOR, WIBOR, STIBOR, NIBOR), “significant”, or “non-significant”, based on quantitative thresholds. Administrators of non-significant benchmarks are currently subject to reduced obligations under the EU BMR, but they are nonetheless required to be registered or recognised, or have their benchmarks endorsed, and they need to produce compliance statements for their benchmarks.

If the proposal is adopted in its current form, EU and third-country non-significant benchmarks will no longer be within scope of the EU BMR, on the basis that they do not present a systemic risk. According to the proposal, administrators of non-significant benchmarks account for around 90% of all administrators active in the EU, so this would considerably reduce the number of administrators and benchmarks subject to the regulation.

Proposals for significant benchmarks

The proposal recommends retaining the current use threshold of €50 billion ($53 billion) to determine whether a benchmark is significant, but ESMA and relevant competent authorities would also be able to designate benchmarks as significant if they were under the threshold but met other, qualitative, criteria.

Benchmarks would be designated as significant by the administrator, the relevant competent authority, or ESMA, and once so designated would be listed as such on the public register maintained by ESMA for this purpose (the ESMA register) (also see “Changes to the ESMA” register below).

If a significant benchmark or its administrator failed to comply with the EU BMR, ESMA or the relevant competent authority would issue a public notice to that effect (a prohibition notice), after which EU supervised entities would no longer be permitted to use the benchmark, subject to a possible six-month adaptation period. This notice would also need to be published on the ESMA register.

No change to critical benchmarks

No changes are proposed to the categorization or treatment of critical benchmarks.

EU CTBs and PABs

Benchmark administrators are currently able to label their benchmarks as EU Climate Transition Benchmarks (CTBs) or EU Paris-aligned Benchmarks (PABs), subject to certain conditions.

In its proposal, the Commission recommends that these benchmark labels should only be available for benchmarks provided by EU administrators, and that all EU CTBs and EU PABs should be regulated in the same way as significant benchmarks, irrespective of their prevalence.

No change to third-country regime

Under the EU BMR in its current form, EU supervised entities can only use a third-country benchmark if:

1. its administrator is in a jurisdiction with a regulatory regime that has been determined to be “equivalent” to that of the EU; or
2. the benchmark is IOSCO-compliant, and the administrator has obtained prior recognition from ESMA; or
3. it has been endorsed by an appropriate EU entity in accordance with the EU BMR.

In such case, the administrator and its EU-approved benchmarks are added to the ESMA register.

The routes to permitted EU use of a third-country benchmark are considered to be unduly onerous, and market consensus is that they are overly restrictive and dissuade non-EU administrators from seeking approval for their benchmarks to be used in the EU. The equivalence route, which was supposed to help “fast track” third-country benchmarks, has not had the desired effect, largely because to date only two jurisdictions have been found to have equivalent rules to the EU (Singapore and Australia).

This has thus far been mitigated by broad transitional provisions that permit the use of all third-country benchmarks until the end of 2023 – soon to be extended to the end of 2025. However, this is not a long-term solution. Market concerns are that, once the transitional period expires, the universe of benchmarks available for use by EU supervised entities will be considerably reduced, resulting in a narrower market and restricting EU financial institutions’ ability to use non-EU benchmarks in investment and hedging products. This could ultimately result in higher costs for end users and favour financial institutions that are outside the EU.

It had been hoped that the Commission would address these shortcomings in its proposal, and streamline the regime. Instead, the Commission suggests that the overall reduction in scope removes the need to amend the regime, as fewer third-country administrators will need to use the routes described above.

Changes to the ESMA register

At present, there are two limbs to the ESMA register: one for EU administrators and one for non-EU administrators. A common observation is that it can be hard to ascertain which benchmarks are provided by a particular administrator, and whether they are BMR-compliant. This is partly because of the transitional provisions discussed above.

If the Commission’s proposed changes are implemented, the ESMA register will be broadened so that it becomes a “golden source” of information for potential users of benchmarks, containing all the information about a particular benchmark and its administrator needed to determine whether it is available for use by EU supervised entities.

The proposal suggests amending the ESMA register so that it contains the following information:

• details of EU administrators that are authorized or registered under the EU BMR;
• details of non-EU administrators that are in an equivalent jurisdiction, and a list of the benchmarks that they are authorized to provide in the EU;
• details of non-EU administrators that have obtained recognition under the EU BMR, and a list of the benchmarks that they are authorised to provide in the EU;
• details of the third-country benchmarks that are endorsed under the EU BMR, and their administrators;
• a list of all critical benchmarks;
• a list of all EU CTBs and PABs;
• a list of all significant benchmarks; and
• a list of all significant benchmarks that may no longer be used in the EU because they are subject to a prohibition notice.

According to the proposal, this should mean that potential users of a benchmark will be able to determine from looking at the ESMA register (i) the category of a benchmark (including whether it is non-significant and therefore out of scope) and (ii) whether any prohibition notice has been published in respect of the benchmark.

Changes to Article 29

At present, Article 29 of the EU BMR provides, broadly, that EU supervised entities may only use a benchmark if the benchmark or its administrator is listed on the ESMA register.

The Commission’s proposal suggests removing this and instead providing that EU supervised entities must not:

• add “new references” to a CTB or a PAB where the administrator is not on the ESMA register; or
• add “new references” to a significant benchmark where the benchmark is subject to a prohibition notice.

“New references” appears to refer to new use of a benchmark in an in-scope instrument, but this may be clarified in further versions of the proposal.

If a benchmark becomes subject to a prohibition notice, supervised entities need to replace it in any in-scope instruments or contracts within six months, or, if there is no appropriate alternative, publish a statement to that effect.

The Article 29 requirement for prospectuses to state whether a referenced benchmark is provided by an administrator which is on the ESMA register is retained.

Commentary

Non-significant benchmarks make up the vast majority of benchmarks used in the EU, so the benefits of the Commission’s proposal would extend beyond administrators to supervised entities looking to reference such benchmarks in their financial instruments.

Of particular interest will be the “upgrades” to the ESMA register, which should make it much easier for supervised entities to determine whether a particular benchmark is available for use in the EU.

The proposal now needs to be reviewed by the European Parliament and the Council, so remains subject to change.