Brexit and the Benchmark Regulation

Overview

• The UK government has published an explanatory note relating to as yet unpublished rules on how the EU Benchmark Regulation will be "onshored" if the UK leaves the EU in a "no deal" scenario.
• In such case, the UK intends to introduce a "UK Benchmark Regulation", which will replicate the existing EU Benchmark Regulation but will apply only in the UK.
• Under the UK Benchmark Regulation, a new UK register will be established by the FCA and will operate in parallel with the existing EU register maintained by ESMA:

• a benchmark which is used in both the UK and the EU, and/or its administrator, will need to be included on both registers¹;
• FCA approved administrators and benchmarks which are on the ESMA register on exit day will automatically be included on the UK register; and
• any non-UK administrators and benchmarks which are on the ESMA register on exit day will automatically be included on the UK register for two years (subject to removal following a rejected application for UK approval or if the benchmark or administrator is removed from the ESMA register).

• Functions currently undertaken by EU institutions will be transferred to UK bodies, including HM Treasury and the FCA.
• The UK Benchmark Regulation will only apply if the UK exits the EU without an agreement with the EU.

What has happened?

On 23 November 2018, the HM Treasury department of the UK government published The Benchmarks (Amendment) (EU Exit) Regulations 2018: explanatory information. The note explains what the proposed regulations (the "UK Benchmark Regulation"), which are not yet available even in draft form, will seek to achieve. The UK Benchmark Regulation will form part of a raft of statutory instruments which are expected to come into force on or prior to exit day to ensure that retained, or "onshored", EU law continues to function effectively once the UK has left the EU. The UK Benchmark Regulation will only apply if the UK exits the EU without an agreement with the EU; if the UK ratifies the withdrawal agreement endorsed by the European Council on 25 November 2018, the existing EU Benchmark Regulation will continue to apply in the UK during the transition or implementation period until 31 December 2020.

Continued application to the FCA

Under the UK Benchmark Regulation, UK benchmark administrators will still need to apply to the FCA for authorisation or registration. However, the regulation:

• clarifies that the scope of the UK Benchmark Regulation - and therefore the scope of any authorisation or registration granted by the FCA - is only the UK, and not the whole of the EU; and
• provides that EU administrators and benchmarks are subject to the third country provisions of the UK Benchmark Regulation. Therefore, unless an equivalence determination is made by the UK in respect of the EU Benchmark Regulation, EU administrators and/or benchmarks will need to apply for approval via recognition or endorsement by the FCA, in the same way that non-EU administrators and benchmarks must under the current EU regime.

UK benchmarks register

Under the existing EU Benchmark Regulation, when a benchmark or administrator is approved in an EU member state, it is added to the register maintained by ESMA. The UK Benchmark Regulation will introduce its own UK register, which the FCA will maintain. From exit day, subject to any applicable transitional provisions, UK supervised entities will only be able to use benchmarks which are on the UK register.

Migration and transitional provisions

Existing UK authorisations and registrations: Under the UK Benchmark Regulation, the following will be automatically migrated from the ESMA register to the UK register on exit day:

• administrators that have already been authorised or registered by the FCA;

• third-country benchmarks that have been recognised by the FCA or effectively endorsed by UK entities prior to exit day; and

• third-country administrators that have been recognised by the FCA or effectively endorsed by UK entities prior to exit day.

Existing UK authorisations and registrations: Non-UK administrators and their benchmarks will need to seek to be added to the UK register via equivalence, recognition or endorsement. This is the case even for those which are already on the ESMA register. Accordingly (subject to "Transitional provisions" below) administrators may need to obtain approval under two separate regimes. It is likely that the UK government will grant equivalent status to the EU, but this is not yet certain.

Transitional provisions: The UK Benchmark Regulation will incorporate a transition period, under which any non-UK authorised benchmark or administrator which is on the ESMA register on exit day is automatically included on the UK register for 24 months. This period will be cut short if the benchmark or benchmark administrator is removed from the ESMA register (save where the FCA considers that this would not be compatible with its strategic objective or would have a material adverse effect on the advancement of its operational objectives) or an application for approval in the UK is refused.

In relation to benchmarks and benchmark administrators not transposed onto the UK register on exit day, whilst not explicitly stated in the note, the assumption is that the UK Benchmark Regulation will incorporate the same transitional provisions as the existing EU regime, which lasts until 1 January 2020 (or slightly later for in-flight applications).

UK administrators and UK-administered benchmarks: The EU has thus far not proposed the introduction of similar transitional provisions for UK administrators and UK-administered benchmarks (such as LIBOR) which are currently on the ESMA register. In the event that no transition period is introduced, and no equivalence decision is forthcoming, EU market participants would (subject to the transitional arrangements which are already in place under the EU Benchmark Regulation for third-country administrators) be prohibited from using UK-administered benchmarks following a "no deal" Brexit.

Prior EU rejections

An administrator whose authorisation or registration application has been rejected under the current EU regime prior to exit day will be deemed to have been similarly rejected under the UK Benchmark Regulation, and therefore use of the administrator's benchmarks in the UK will remain prohibited unless and until it makes a successful application in the UK.

Transfer of functions

The Commission's power to adopt delegated acts (which includes the power to update the list of critical benchmarks) will be transferred to HM Treasury. All non-legislative functions under the UK Benchmark Regulation will be transferred to the FCA.

Next steps

The FCA plans to update its Handbook and relevant technical standards to reflect the changes to be introduced through the UK Benchmark Regulation. Once published, the draft UK Benchmark Regulation will be laid before Parliament before the UK exits the EU.

Further information

All Ashurst briefings on the Benchmark Regulation and the legislation itself can be accessed on our Finance Hub: https://www.ashurst.com/en/news-and-insights/hubs/finance-hub/bmr/.

1.  Where applicable, following the end of the transitional period. Approval for use and corresponding inclusion on the register can be achieved through authorisation or registration by a national competent authority, or via equivalence, recognition or endorsement. It is widely expected that an equivalence determination will be made in respect of the EU by the UK under the UK benchmark regime. It is unclear whether a similar determination will be made by the EU under the existing EU regime in respect of the UK.