The proposal would substantially reduce the number of benchmarks in scope of the EU BMR.
On 17 October 2023, the European Commission published a legislative proposal that would significantly alter the benchmarks in scope of the EU Benchmarks Regulation (BMR). The proposal aims to address long-standing criticisms of the BMR’s wide-reaching scope and practical impact, and would enable EU regulators to focus only on the most economically and socially important benchmarks.
What is changing for benchmark administrators?
The Commission is proposing to change the scope of the BMR so that it only applies to critical benchmarks, significant benchmarks, EU Climate Transition Benchmarks, and EU Paris-Aligned Benchmarks. Consequently, both EU and third-country administrators of non-significant benchmarks would no longer be in scope of the BMR, although the Commission notes that it is established market practice for all benchmark administrators to operate in accordance with the IOSCO Principles. The Commission estimates that this change would remove around 90% of administrators from the scope of the BMR.
The BMR currently captures all benchmarks used within the EU by supervised entities that meet the relevant definition, regardless of their level of use or economic importance. However, the BMR does distinguish between different types of benchmarks and includes more proportionate requirements for non-significant benchmarks.
In relation to third-country benchmarks, the BMR requires that supervised benchmark users can only use third-country benchmarks that qualify for use in the EU under the BMR’s third-country regime. This requires third-country benchmarks to qualify via one of three routes: equivalence, recognition, or endorsement. All of these routes require compliance with standards equivalent to the BMR, and many third-country benchmark administrators have not shown the appetite for providing their indices in the EU under such conditions. The Commission estimates that only around 5% of third-country administrators have successfully used one of the three available access routes to the EU market. Due to concerns that the BMR would severely restrict the number of third-country benchmarks available for use in the EU, the EU has repeatedly pushed back the application of the third-country regime. This proposal would provide a welcome longer-term solution by limiting the number of third-country benchmarks subject to the regime.
The Commission is also proposing a new requirement for EU Climate Transition Benchmarks and EU Paris-Aligned Benchmarks to be administered by EU authorised or registered administrators; third-country administrators would not be able to administer such benchmarks.
When is a benchmark considered significant?
Under the existing framework, benchmarks are significant if they are referenced by financial instruments and financial contracts in the EU with a total value above €50 billion, or can be designated as significant if their discontinuation could have a significant adverse impact on financial stability, market integrity, or consumers. The Commission is proposing a more streamlined and coordinated approach to designating benchmarks as significant, and notes that such designations should remain limited.
Under the proposals, benchmark administrators (including third-country administrators) would need to notify their local regulator (or ESMA, in the case of third-country administrators) when any benchmark they administer exceeds the €50 billion usage threshold. They would then have 60 working days to seek authorisation, registration, endorsement, or recognition under the BMR. Therefore, all administrators would need to monitor the use of their benchmarks within the EU. The existing uncertainties around how this calculation works in practice remain, with no further detail being offered in this legislative proposal.
What would happen to existing regulated administrators that fall outside of scope?
The proposal does not directly address what would happen to EU and third-country administrators of non-significant benchmarks that are currently authorised, registered, endorsed, or recognised under the BMR, although the implication seems to be that their regulated status would fall away when the changes to the BMR take effect from 1 January 2026. Clarity on this point would be welcomed given the current burden that BMR compliance brings. However, the proposal does provide that administrators regulated under the BMR before the changes take effect would be subject to a simplified authorisation procedure if they come back into scope of the BMR within two years of the changes taking effect.
What is changing for supervised benchmark users?
The changes to scope would ensure that supervised benchmark users continue to have access to a wide range of indices, including third-country benchmarks.
The Commission is also proposing to remove the obligation on users to individually verify the regulatory status of indices they wish to use as benchmarks by consulting websites and public registers. Under the proposal, users would only be required to check the ESMA register to verify that a benchmark is not subject to a public notice prohibiting its use.
The proposal will now need to be agreed by the European Parliament and Council before it is made into law. The Commission has proposed that the changes would apply from 1 January 2026, therefore coinciding with the expiry of the transitional period for third-country benchmarks, which is in the process of being extended to 31 December 2025.
Interestingly, in its proposal the Commission makes reference to the proposed regulatory regime for ESG ratings providers, which shares some similarities with the BMR. The Commission seeks to differentiate the plans for ESG ratings providers, indicating that it will continue to “take an encompassing approach to the regulation of ESG rating activities, including a third country regime”. Consequently, the change in approach under the BMR should not be read across into this proposal, in which the market had been looking for a similarly reduced third-country regime.
Meanwhile, the UK has yet to undertake its planned review of the UK BMR, as part of its work to repeal and restate retained EU law. The transitional period for third-country benchmarks in the UK will run until 31 December 2025, but the UK has yet to make a decision regarding the long-term future of the regime. Following the approach proposed by the EU would seem sensible in order for the UK market not to suffer from a competitive disadvantage. However, the UK BMR is not currently scheduled for review in 2023 or 2024, so it is a waiting game to see whether a similar proposal will be made.