On Friday 29 June, the Benchmarks Regulation (Amendment) Instrument 2018 (the "Instrument"), which makes various changes to the FCA Handbook to ensure consistency with the Benchmarks Regulation (the "BMR"), came into effect.
Separately, the FCA published Handbook Notice No. 56 (the "Notice"). The Notice provides important commentary on the Handbook changes, and provides further guidance on key outstanding issues raised by industry in connection with previous FCA consultations, principally Consultation Paper CP 18/5 ("CP18/5").
Background to the changes
The changes to the Handbook are largely uncontroversial, and for the most part, track the proposed amendments which were foreshadowed in Policy Statement PS17/28 ("PS 17/28").
The principal effect of the Instrument is to shift the FCA rules on benchmark regulation from the pre-BMR position, in which only certain "specified benchmarks" attracted regulatory obligations, to the post-BMR position, in which a far wider range scope of benchmarks now potentially fall within scope.
Key changes to the FCA Handbook
As highlighted in the Notice, most of the changes involve removing domestic rules that have now been superseded by the BMR.
Amongst other things, the Instrument introduces a new regulated activity of "administering a benchmark" under article 63S RAO, and the related concept of a "regulated benchmark administrator". However, as clarified in the Notice, existing rules which apply to administrators of, and submitters to, benchmarks currently under FCA regulation, will continue to apply, until the administrators of those benchmarks become authorised or registered under the BMR (see for example MAR 8.3).
This transitional arrangement is uncontroversial, merely giving effect to the transitional provisions for administrator authorisation under the BMR, however they provide some useful clarity in the Handbook.
Nature of administrator authorisation
Specific consideration has been given to industry concerns about the drafting of the new regulated activity under article 63S. Via specific amendments to PERG, the FCA has made clear, that a person will only need to be authorised or registered in the UK if the person is "located" in the UK (i.e. has its registered office in the UK).
Again, this position is merely reflective of the general principle under the BMR that administrators should seek authorisation from their home state regulator (if located within the EU), or seek entry to the Article 36 Register via an appropriate "third country" channel if based outside the EU. The new wording does however avoid potential confusion, where administrators based in other EU member states, physically carry on administration activities within a UK branch, having obtained authorisation as an administrator elsewhere in the EU (or via an applicable "third country" route).
In such circumstances, these administrators will be entitled to rely on their existing authorisation, and will not need to apply for an additional UK licence in connection with these administrator activities (notwithstanding the traditional UK view that where an activity is carried on in the UK, it should be regulated in the UK).
Rejected administrator applications
Under the BMR, users of benchmarks provided by EU benchmark administrators are not permitted to use benchmarks provided by those administrators whose applications have been rejected, even if the rejection takes place prior to the expiry of the BMR transitional period in 2020.
Consequently, in response to CP 18/5, industry attention was drawn to the importance of users being notified, where an EU administrator application is refused. In the Notice, the FCA acknowledges that it is important for supervised users of benchmarks to have timely information about refusals of administrator applications, and has confirmed that it will "therefore usually publish such refusal decisions" (emphasis added).
This statement falls short of confirmation that all rejected applications will be made publicly available, but should provide some comfort to benchmark users. Clarity from other EU regulators as to whether equivalent information regarding rejected applications will be published, would be a welcome step for benchmark users across the EU.
Applications for recognition and endorsement
The Notice goes on to state that refusals of applications for endorsement and recognition do not have the same consequences for users during the transitional period (i.e. they will not render benchmarks provided by those administrators "unusable" for that period), but the FCA intend on adopting the same approach to publishing such decisions.
Pending administrator applications
Interestingly, the FCA has commented that it does not intend on publicly revealing information about pending applications.
Whilst the Article 36 Register of authorised administrators has become increasingly populated over recent time (with notable additions including ICE Benchmark Administration Limited, LIBOR's administrator), it seems likely that a number of administrators will bide their time before making an application, with a view to fully benefitting from the transitional period.
In circumstances where EU administrators seek to enjoy as much of the transitional period as possible, prior to seeking authorisation, and continue to provide benchmarks during that period, in the FCA's view, the onus will be on those administrators to provide assurances to benchmark users that they can continue to use those benchmarks.
Accordingly, where users are in doubt as to whether they can compliantly use a benchmark in such circumstances, an active dialogue with the relevant administrator is likely to be advisable.
Author: Sean McCaffrey, Associate, Finance Regulatory
