The MFSA has recently issued two Circulars in relation to Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the “BMR”). The BMR aims to ensure that benchmarks are robust, reliable and minimise conflict of interest while safeguarding the integrity and accuracy of benchmark provision.
Benchmarks and Indices
The BMR defines an Index as defined as any figure that is either published or made available to the public or a figure that is regularly determined in one of the following ways:
(i) entirely or partially by the application of a formula or any other method of calculation, or by an assessment; and
(ii) on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys.
In this regard, Benchmarks refer to any Index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an Index that is used to measure the performance of an investment fund with the purpose of tracking the return of such Index or of defining the asset allocation of a portfolio or of computing the performance fees.
Different types of benchmarks
The BMR provides for different types of benchmarks which include the following:
Regulated data Benchmarks – are those which the input data being provided directly from regulated trading venues;
Interest rate Benchmarks – are determined on the rate at which banks lend to, or borrow from, other banks or agents in the money markets;
Commodity Benchmarks – which their underlying asset is a commodity as defined by MIFID II.
Critical benchmarks - benchmarks which the value of financial contracts underlying them amounts to at least EUR 500 billion or it is recognised by the Member State as critical;
Significant Benchmarks - benchmarks which value of the underlying financial contracts amount to at least EUR 50 billion or in cases where are a few to none market-led substitutes, so much so that if the Benchmark is ceased to be provided, there would be an impact on financial stability.
The BMR provides for different requirements for the above Benchmarks and also lays down certain exemptions which may be granted to different benchmarks.
Requirements under the BMR
The BMR also provides for different parties which include the following:
Contributors – persons that contribute in inputting data. A supervised entity contributing input data to an administrator in the EU is referred to as a supervised contributor;
Administrators – persons that have control over the provision of a Benchmark. An administrator has to apply for an authorisation in case the Benchmark is a critical Benchmark or for registration in case of non-critical Benchmarks;
Users – use of a Benchmark includes the following;
issuance of a financial instrument which references an index or a combination of indices;
determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices;
being a party to a financial contract which references an index or a combination of indices;
providing a borrowing rate that is calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference in a financial contract to which the creditor is a party;
measuring the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio, or of computing the performance fees.
Use of Benchmarks by Maltese entities
Through its Circular, the MFSA notifies entities that it is conducting an exercise to determine and assess the practical use of Benchmarks by Maltese entities and identify which entities make use of EU Climate Transition Benchmarks and/or EU Paris-aligned benchmarks.
Entities which make use of Benchmarks as defined under the BMR are required to ensure that they only make use of Benchmarks that are provided by Benchmark Administrators included in the ESMA Benchmarks Register. In order for the Authority to determine and assess the actual usage of Benchmarks, entities are requested to participate in this study by completing the questionnaire provided by not later than the 20th March 2020.
Feel free to contact us if you require any further information relating to the BMR.