European asset managers warned: EU Benchmark regs are coming for you
European asset managers face major changes beginning on 1 January next year, when the EU Benchmarks Regulation (BMR) takes effect, a new white paper published by New York-based RIMES Technologies notes.
The new legislation, which was adopted by the European Union on June 30, 2016, was a response to the benchmark manipulation that lay at the root of the so-called LIBOR scandal, when certain major financial institutions were found to have illegally fixed the London interbank offered rate.
Now, warns the chief operating officer of RIMES’s regulatory divison, Bruno Piers de Raveschoot, who authored the 16-page RIMES white paper, everyone connected with the use of financial benchmarks in the bloc – including asset managers as well as administrators of such benchmarks, contributors to them and users of them – are advised to get ready.
“The very first step [to address the risk exposure of any firm to BMR] is to know what indices are used” by it, Piers de Raveschoot writes, adding that it is “essential as soon as possible” to create an “inventory” of all the indices used by one’s firm, and then, using this list, to establish the exact regulatory risk exposure the firm is likely to face.
The BMR rules require European asset managers to overhaul their data management and compliance processes that they currently use for benchmarks.
According to Piers de Raveschoot, the BMR represents a step change in the way the EU’s financial benchmarks are currently regulated, and will have a transformative effect on the operations of most European asset management companies – thus, he says, the need to get ready.
‘Three core areas’
The regulation will, Piers de Raveschoot notes, focus on three core areas:
- Governance and controls over the benchmark process, with a focus on conflicts of interest;
- the quality of input data and methodologies, ensuring that data contributors are subject to adequate controls, to avoid conflict of interest or data manipulation;
- the protection of consumers and investors, through greater transparency, rights of redress and, in certain cases, a suitability assessment
The BMR legislation, Piers de Raveschoot goes on, provides for three types of supervised entity – administrator, contributor and user. An administrator is considered, under these rules, to be any organisation that provides indices to benchmark users that are used in pricing or allocating assets, to determine the amount payable under financial instruments, investments or contracts.
Those deemed to be contributors, on the other hand, are those organisations that contribute or provide input data to a benchmark currently used in the EU.
Users are considered to be any entity, such as an asset manager, that uses indices as a benchmark for their financial instruments or contracts.
To read and download the RIMES Benchmark Regulation White paper, click here.