United Kingdom and European Union benchmark section (UK BMR / EU BMR)
Background
The Benchmark Regulation EU 2016/1011 of the European Parliament and of the Council dated 8 June 2016 (EU BMR), was introduced due to concerns about the accuracy and integrity of indices used as benchmarks in financial markets. The BMR builds upon the global standards set out in principles published by the International Organisation of Securities Commissions (IOSCO) known as the “Principles for Financial Benchmarks” and imposes certain requirements on firms that provide, contribute to or use benchmarks in the European Union (EU) as defined in the EU BMR.
Although the EU BMR came into effect on 1 January 2018, it contains transitional arrangements for existing EU and third country benchmark administrators, allowing such administrators to apply for authorisation, recognition or enforcement from the relevant EU bodies prior to a specific date. This date was originally 1 January 2020; however, on 26 February 2019, the European Council and Parliament reached a political agreement to amend EU BMR to extend the transitional provisions for critical and third country benchmarks by a further two years to 1 January 2022. As a result, significant and non-significant EU benchmarks are required to be authorised by 1 January 2022(?) for use within the EU.
At 11pm GMT on 31 January 2020, the United Kingdom (UK) ceased to be a member of the EU and a transition period came into effect. Such transition period came to an end at 11pm GMT on 31 December 2020 and as of such time the UK became a third country under EU law, including EU BMR. A body of retained EU law has been created in the UK which is based on the EU law that applied to the UK prior to this date.
“UK BMR” means EU BMR as it forms part of retained EU law as defined in the European Union (Withdrawal) Act 2018 (as amended).
Similar to EU BMR, UK BMR contains transitional arrangements for third country (non-UK) benchmark administrators, allowing such administrators to apply for recognition or enforcement from the UK’s financial conduct authority (FCA) prior to a specific date.
Third country benchmark administrators will need to be authorised under the UK’s recognition or endorsement regime by 31 December 2022, unless an equivalence declaration is given by the UK in respect to them prior to such date. The UK Government has announced that it intends to extend this deadline to 31 December 2025. As a result, third country administrators who want to continue using their benchmarks in the UK after 31 December 2025, must apply to the FCA for approval via equivalence, recognition or endorsement, before this date.
In preparation for the end of the Brexit transition period on 31 December 2020, the FCA developed a new UK Benchmarks Register. This replaced the ESMA Register for UK supervised users, and UK and third country-based benchmark administrators that want their benchmarks to be used in the UK.
UK supervised entities within the National Australia Bank Limited group of companies (together, NAB) are required to comply with the UK BMR and EU BMR, as applicable.
NAB robust written plan
Article 28.2 of the EU BMR provides, among other things, that:
EU supervised entities that use benchmarks must produce and maintain a robust written plan setting out the actions to be taken in the event that one or more benchmarks materially change or cease to be provided. Where feasible and appropriate, the plan shall nominate one or several alternative benchmarks that could be referenced to substitute the benchmarks no longer provided, indicating why such benchmarks would be suitable alternatives.
NAB has written “Financial Benchmark Fallback Plan” to address the requirement in Article 28(2) of EU BMR (the Plan). This webpage contains a high-level summary of that Plan. Following a benchmark cessation or material change to a benchmark (together, a Trigger Event), NAB will invoke its Plan.
As a first step a qualitative assessment will be conducted to determine the materiality of the impact of the Trigger Event. Based on this materiality assessment an escalation decision will be made, after which a further, detailed impact assessment may be executed. This detailed assessment will include a quantitative and qualitative assessment of the Trigger Event, including where appropriate:
- Identification of all products, transactions and counterparties including an impact analysis in terms of notional values, risk exposures and type of legal agreements;
- A review of affected agreements, products, counterparties and transactions including checking whether the existing contractual arrangements already contain alternative benchmarks and to what extent a benchmark event frustrates or otherwise breaches the terms of any financial contract or financial instrument; and
- A qualitative review of the impact to internal systems, models and processes.
The overall purpose of the steps outlined above is to identify, where feasible and appropriate, a suitable and appropriate alternative benchmark that can be referenced in substitute of the existing benchmark subject to the Trigger Event. NAB will follow market standards to identify such alternative benchmarks as much as possible. For example, it is expected that for “critical benchmarks” (as defined in Article 20(1) EU BMR) the market, for example a Central Bank or working group or calculation agent, will nominate an alternative benchmark which NAB expects to include in new contractual agreements, where appropriate and relevant.
If it has not been feasible and appropriate to nominate an alternative benchmark based on market standards, a proposal of actions to be taken in relation to the affected benchmark may be prepared. The proposal will take into account the impact assessment and shall consider the replacement of that benchmark with an alternative benchmark, seeking approval or notifying a regulatory body (where relevant), amendment to contractual documentation, and notification of stakeholders.
Once the proposal has been approved, internal stakeholders will work together to implement the proposal. For example, clients may be notified or their consent may be sought to change the benchmark, and contractual documentation may be amended.
The description above is a high-level summary of the Plan only, and the process to be taken in relation to different countries, business lines or circumstances may differ. This summary only serves to provide general background information, is indicative and not necessarily complete or correct and is not intended to provide any individual, legal or other advice. The Plan and this summary are subject to change without notice.
Details of EU BMR are available at: https://ec.europa.eu/info/law/benchmarks-regulation-eu-2016-1011_en
Details of UK BMR are available at:
https://www.legislation.gov.uk/ukdsi/2019/9780111179208/contents
https://www.legislation.gov.uk/uksi/2020/628/regulation/12/made
Financial Benchmark Reform – Disclosures for Derivatives, Floating Rates Notes and Loans
