On 20 December 2017, the FCA published its final policy statement (PS17/28) on the European Benchmark Regulation (BMR). The policy statement followed on from consultation paper CP17/17 which the FCA published in June 2017. The policy statement notes that the FCA is waiting on HM Treasury to make certain required changes to UK secondary legislation. For this reason, despite the BMR applying from 1 January 2018, the changes to the FCA's Handbook are near-final only, and final rules can only be made once the necessary legislative process is complete. PS17/28 also sets out the final draft forms for authorisation, registration, recognition and endorsement.
A key point to note is that the FCA will issue further consultations in 2018 on governance requirements for administrators, and for any UK branches of third country firms who use benchmarks that are likely to fall within scope of the BMR but who are not already caught by the regulation.
Supervised UK branches of third-country firms that use benchmarks
PS17/28 notes that not all branches of third country firms will be caught by the BMR requirements on supervised users.
The FCA intends to consult on a proposal to apply those requirements to UK branches of third country firms that are supervised by the FCA, to the extent the BMR does not already apply to them directly.
This will prevent such a branch from providing financial products based on non-approved benchmarks, when this would not be possible for a UK or other EU firm. This is an important point to note and is likely to be of interest.
Application of the APR / SM&CR to Benchmark Administrators
The FCA has confirmed that it intends to pursue the approach set out in CP17/17 regarding the proposed application of the approved persons regime (APR) / the Senior Managers & Certification Regime (SM&CR) to benchmark administrators. On this basis, the APR will apply to benchmark administrators, except for the few firms to which the SM&CR applies.
The FCA has said it will consult separately on consequential changes to the proposed extended SM&CR rules to reflect their application to benchmark administrators in place of the APR.
Interaction between BMR rules and existing fca rules on benchmarks
The FCA has not changed its approach to the application of the existing rules for benchmark administrators (of those eight benchmarks which are listed as specified benchmarks in the UK) and contributors during the transitional period. This means that the FCA's existing rules will apply to the limited number of administrators of the current specified benchmarks until such time as those administrators are authorised or registered. Once all specified benchmarks administrators are authorised or registered, it is likely that the existing regime will then fall away. Given that the FCA is already accepting draft applications for authorisation or registration, it would be surprising if the existing rules last until the transitional long stop date of 1 January 2020.
Interaction with the FCA Handbook
PS17/28 provides some guidance on how the BMR is likely to interact with other relevant parts of the FCA Handbook. In particular, it highlights the interaction between the BMR and various relevant parts of MAR (e.g. the requirement in MAR 8.5 for each benchmark administrator to inform the FCA as to which approved person is responsible for ensuring the firm implements its regulatory obligations as a benchmark administrator).
Extension to EEA administrators and contributors
The FCA notes that it had expected that the BMR would be extended to the EEA, and drafted its proposed rules on that basis. This extension has not happened as yet, so the FCA has limited the scope to the EU. The FCA notes that, in the event the BMR is extended to the EEA, the Handbook will be amended to reflect this, without the need for further consultation.
Article 28(2) fallback provisions
On 14 December 2017, ESMA published updated Q&A on the BMR. One of the key points was ESMA's clarifications on the article 28(2) BMR provisions (i.e. fallback provisions). In its Q&A ESMA confirmed the application of article 28(2) BMR to legacy contracts. ESMA noted that legacy contracts should not be disregarded as a blanket principle, but amended where practicable. The recent ESMA Q&A states that, "[i]n relation to contracts entered into prior to 1 January 2018 and still existing at that date, ESMA expects supervised entities, other than administrators, to amend them where practicable and on a best-effort basis."
It is worth noting that PS17/28 does not provide much further guidance on the application of article 28(2) BMR, although this is perhaps unsurprising in view of the timing of the ESMA Q&A.
Next steps
Generally the FCA used PS17/28 to encourage firms that use or provide input data for a benchmark to consider whether they are a "supervised user" or a "supervised contributor" as defined in the BMR.
More specifically, the FCA confirmed that it will consult separately next year on extending the SM&CR to benchmark administrators, as well as consulting on applying the BMR rules on users of benchmarks to supervised UK branches of third country firms to the extent they are not currently regarded as supervised entities for the purposes of the BMR. These are two publications to look out for in 2018.
In the meantime, the BMR is now in force.
