UK BMR: UK to extend third-country benchmarks transitional regime until end-2030

What has happened?

On 8 November 2023, HM Treasury published a draft statutory instrument, which, if adopted, will extend until 31 December 2030 the UK BMR transitional period during which UK supervised entities can use third-country benchmarks that are not on the FCA register.

The draft legislation is expected to pass through Parliament without amendment and the extension will take effect from 1 January 2024. The UK government intends to use the additional time to consider permanent reforms to the third-country regime.

On the EU side, the co-legislators are also currently considering  broad changes to the EU BMR, but have retained the application date of the EU third-country regime as 1 January 2026.

As the EU and the UK implement changes to their respective benchmarks regimes, we can expect to see increased divergence, causing significant regulatory and operational difficulties for affected entities.

What is the transitional period?

Under the UK Benchmarks Regulation¹ (UK BMR), UK regulated entities may only use a non-UK administered benchmark (a third-country benchmark) in the UK if it is included in a register maintained by the FCA for this purpose. "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 FCA register via one of three routes:

• equivalence - an equivalence decision has been made in respect of the administrator's jurisdiction;
• recognition - the administrator has obtained prior recognition from the FCA; or
• endorsement - an appropriate UK supervised entity has endorsed 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 UK and the EU, so few equivalence decisions have been made. As a result, only a small proportion of third-country benchmarks are on the FCA register. The third-country transitional provisions allow in-scope UK entities to continue using third-country benchmarks even if they are not on the FCA register, giving them more scope in their choice of benchmark.

The UK government does not want the third-country regime to take effect until it has been made more palatable for non-UK administrators, to avoid limiting UK firms' choice of benchmarks. In light of the many competing priorities, HM Treasury has indicated that this is unlikely to be achieved by the transitional provisions' current expiry date of 31 December 2025, hence the extension to 31 December 2030.

The corresponding EU BMR transitional provisions are due to expire on 31 December 2025. Therefore, when the UK legislation enters into force, this will create a divergence in the UK and the EU positions. International groups which contain entities that are subject to the UK BMR and entities that are subject to the EU BMR will need to ensure compliance with the applicable regime and that only permitted benchmarks are being used.

Commentary

Market participants had been hoping that the UK BMR would form part of tranche 3 of the UK government's legislative reforms under the Financial Services and Markets Act 2023, and would therefore be amended over the course of the next year or so. 

Given that a key area for reform under the UK BMR is the third-country regime, the significant extension to the third-country transitional provisions suggests that this will not be the case and that other pieces of legislation are considered a higher priority. This is disappointing, but the extension does at least provide relatively long-term certainty for benchmark users.

Authors: Mike Logie and Kirsty McAllister-Jones

_{1. EU Regulation 2016/1011 as onshored into domestic law.}