Warning over benchmark regulation breach

Warning over benchmark regulation breach

“Hundreds” of financial institutions could be fined a tenth of their revenues if they don’t comply with new EU Benchmarks Regulations (BMR) coming into force on 1 January, financial services regulatory consultancy Bovill has warned.

The 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, which underpin investment funds, mortgages and financial trades.

It aims to make financial benchmarks more reliable.

Article continues after advert

According to Bovill, many firms subject to the BMR are putting off compliance in the belief that it isn’t as urgent as Mifid II.

There is also a two-year transitional period for administrators and index users, which contributes to confusion and firms being complacent, it said.

The FCA  already urged firms last year to tighten up their use of benchmarks before the regulation comes in.

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.”

He warned the transitional period did not apply to users, who should ensure they are 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,” he said.

Bovill believes many benchmarks administrators are unaware of the new regulations while many smaller administrator firms lack staff capacity to put the structures required by the rules in place. 

Some benchmark users have worked on the assumption that the two-year transition period applicable to EU benchmark administrators also applied to their obligations under the BMR, Bovill stated.

But in an update on 15 December European regulator ESMA clarified they were indeed required to have those plans from 1 January 2018 onward, it added.

Gareth Parker of Bovill said: “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.”

He added: “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.”