Richard Porter: Hello, I’m Richard Porter, and welcome to the next instalment of our third party confidence series.
I’m joined today by Greg Campbell and Andy Wrout, who are working closely with our clients to understand and prepare for the impending EU Benchmarks Regulation. This is, of course, particularly pertinent when thinking about the trust agenda in the financial services sector.
Greg, can you set the scene for us – what are the benchmarks and why is it such a talking point at the moment?
Greg Campbell: Sure. Well, I’ll take your first question. What is a benchmark? A benchmark can really be any number of things – it can be an estimate, a rate, a value, an index – anything really that can be used in the construction of a financial product.
Why is everyone so interested in them? It really harks back to the market manipulation that was seen a few years ago, particularly in relation to the LIBOR rate. Where you lose trust – the market may lose trust in these benchmark rates – it really can have a significant disruption on the economy. Literally trillions of dollars are benchmarked to these rates.
As a result of the LIBOR manipulation and other similar manipulations, a series of regulations and frameworks did come into being. Some mandatory, such as the FCA’s MAR 8 requirements which focuses on LIBOR and other such as ICE Swap Rate and the Gold Price, but also more flexible and optional requirements such as the principles issued by IOSCO.
What’s really got everyone animated now, however, is as you referred to, the EU Benchmarks Regulation which is going to be mandatory, and this regulation will have the power to fine heavily and also to impose custodial sentences if it’s not been complied with. So, importantly, the EU Benchmarks Regulation will also have a much wider scope – it will cover not just contribution to an administration of critical benchmarks such as LIBOR, it will cover a broader scope of benchmarks and also the use of those benchmarks.
Richard Porter: Ok it sounds like the definition of a benchmark is actually quite broad, which presumably means, Andy, it’s going to impact quite a big audience. So who actually do you think is going to be impacted by this EU Benchmark Regulation?
Andy Wrout: Well clearly organisations that administer the large scale benchmarks – LIBOR, FTSE, WMR Fix will be impacted. Banks, in particular Investment Banks, will likely administer their own in-house proprietary benchmarks, so they too will be impacted. But more broadly, as Greg mentioned earlier, any regulated entity that sells products referencing a benchmark will need to ensure that the benchmark that they reference is registered by ESMA. So you can start to see that actually there’s a much broader range of organisations impacted by this regulation than you might originally think. It worth mentioning at this stage also that this regulation won’t just impact on organisations based in Europe. Organisations that are domiciled outside of the EU will need to ensure that any benchmarks that they administer are registered with ESMA to enable European organisations to continue to use them.
Richard Porter: Ok, so Greg – what are we suggesting to organisations at the moment, and specifically what should they be doing?
Greg Campbell: There is a lot to do, clearly. The regulation goes live on 1 January 2018, less than a year away for organisations to get their houses in order.
The first step we’re generally advocating is to understand the extent of your exposure to this regulation. You could look at the benchmarks that you contribute to, that you administer yourself and also that you use across your organisation. I would caution however, that benchmarks can lurk in many dark corners of the market – what you may not think of as a benchmark may be a benchmark under this regulation. Definition of ‘benchmark’ is actually a very hot topic in the market at the moment.
The second step would typically be to do a gap analysis on those benchmarks, and whether you have any activities that you need to impose or policies you need to create in order to comply with the regulation.
Finally, and not to be overlooked is the fact that any benchmark administrators and the benchmarks they administer will need to be authorised and approved by ESMA, and in order to do that you need to collate a significant amount of information and submit it to the regulator in time for the deadline. So really, it’s not much of a surprise that in a recent survey we did in the market, the majority of participants actually stated this as a board level priority for them this year.
Richard Porter: Great, so Andy, just to wrap things up – some concluding remarks?
Andy Wrout: Well I would suggest that if you haven’t already done so, organisations should take great care in reviewing the regulation to assess the impact it may have on them. I think organisations should look through their inventories, if they have an inventory already, to start reconciling them against the regulations to ensure they are complete. Then I would begin to categorise my benchmarks into benchmark type, benchmark category, the role they play and the jurisdiction the benchmark is administered in.
Richard Porter: Ok, and anything else?
Andy Wrout: Yes, I mean Greg mentioned it, but I think some organisations are going to have a considerable amount of enhancement they need to do to their current practices as a result of the regulation. So what I’d suggest is the sooner organisations start looking at the regulation and doing an assessment against their current arrangement, the better – because there’s limited time to get this work completed before January 2018.
Richard Porter: Ok, thank you Andy and Greg – hopefully that’s given some insights into the practicalities of the new regulation and what organisations should be doing. As always, if you’d like to discuss any of these issues do please get in contact.
We look forward to sharing further insights and related topics over the coming months, but for now thank you and goodbye.
Director, Stakeholder Assurance, PwC United Kingdom
Tel: +44 (0)7971 479439