EU BMR: EU to extend third-country benchmarks transitional regime
18 July 2023
What has happened?
On 14 July 2023, the European Commission adopted a delegated regulation extending until 31 December 2025 the EU BMR transitional period during which EU supervised entities can use third-country benchmarks that are not on the ESMA register.
The delegated regulation now needs to be approved by the European Parliament and the Council but is likely to be fast-tracked given the impending expiry of the current transitional period on 31 December 2023. Once approved, it will be published in the Official Journal of the EU and enter into force three days later.
What is the transitional period?
Under the EU Benchmarks Regulation1 (EU BMR), EU supervised entities2 may only use a non-EU administered benchmark (a third-country benchmark) in the EU if it is included in a register maintained by ESMA3. "Use" of a benchmark is broadly defined and includes (i) issuing a financial instrument referencing a benchmark, and (ii) determining the amount payable under a financial instrument by reference to a benchmark.
A third-country benchmark can be admitted to the ESMA register via one of three routes:
- equivalence - the EU makes an equivalence decision in respect of the administrator's jurisdiction;
- recognition - the administrator obtains prior recognition from ESMA; or
- endorsement - an appropriate EU supervised entity endorses the benchmark.
The recognition and endorsement routes are notoriously onerous for third-country administrators and are often not used for this reason. With regard to equivalence, very few third-country jurisdictions have implemented benchmarks regulation on the same scale as the EU, so few equivalence decisions have been made4. As a result, only a small proportion of third-country benchmarks are on the ESMA register5.
The third-country transitional regime was incorporated into the EU BMR to allow in-scope EU entities to continue using third-country benchmarks which are not on the ESMA register for a limited period of time. The regime was originally due to expire at the end of 2019, but has been extended twice to avoid creating a "cliff edge" effect. The current expiry date is 31 December 2023. Legislative review by the co-legislators can sometimes take months, so the Commission has asked for this review to be expedited.
When the delegated regulation enters into force it will align the EU BMR transitional regime with that of the UK BMR, the expiry date of which was amended to 31 December 2025 by the Financial Services Act 2021.
Further scope review
This development forms part of a wider review of the general scope of the EU BMR. In the coming months we can expect to see further proposals, including potentially to (i) reduce the overall scope of the regulation so that it only covers certain types of benchmark (for example, significant or systemic benchmarks), (ii) overhaul the third-country benchmark regime, and (iii) introduce further ESG-related provisions.
Authors: Mike Logie, Partner; Kirsty McAllister-Jones, Expertise Counsel; Nikki McIlwham, Expertise Executive.
1. EU Regulation 2016/1011.
2. This includes EU MiFID investment firms and CRR credit institutions.
3. The European Securities and Markets Authority.
4. Australia and Singapore only.
5. The ESMA register lists only 13 non-EU administrators and only about 20,000 non-EU benchmarks that can be used in the EU. However, according to the draft regulation, there are 262 non-EU administrators that are not yet registered in the EU, providing around 3.6 million benchmarks.
