The Benchmark Regulation (EU 2016/1011)1 will come into force in January 20182. It has been welcomed by the investment management industry as a means of restoring market credibility and confidence in benchmarks.
Along with MIFID 2, it presents an opportunity to improve the level of transparency and trust following a series of high profile manipulations of indices across a range of asset classes. The regulation aims to create a level playing field for market participants with robust governance and transparent processes to facilitate market transactions. Compliance with the regulation means there is work to be done, however. Investment managers are analysing their readiness and becoming aware of the significant impact on their operations. The cost of complying with this regulation is likely to weigh on the cost base of the industry, perhaps pushing out some players and stretching existing governance processes even further. Therefore, the scale and expertise needed to manage your business whilst ensuring compliance with the upcoming regulation has led our customers to request a technological solution to address their regulatory needs.
Under the Benchmark Regulation, financial services firms on the buy-side, sell-side and custodians will need to implement new governance processes to audit their index usage. For example, for indices used in financial products, you’ll need to understand their authorization status and classification (critical, significant, non-significant etc.) as determined on the ESMA register3, and also to identify which indices are designated as substitutes in the event that the benchmark loses its authorization status.
MDSL’s Index License Manager (ILM) helps you meet your regulatory obligations by providing a management tool to track your benchmark usage. You can store all your commercial agreements, license terms, indexes and families, but also the catalogues from third party index aggregators. These catalogues allow firms to ‘map’ a standard universe of indexes onto their own portfolio of index consumption (typically this is funds, structured products and data licenses for users). By also including the data from the ESMA register, this mapping also allows you to check that your benchmark usage is in accordance with the regulation because you can see which products are using authorized benchmarks (or otherwise), what their substitutes could be, the named authorised administrators with their competent authority, status and EU endorsing administrator (when needed). When an event occurs such as the withdrawal of the registration of an administrator, or benchmark, or the cessation of the administration of a critical benchmark, a task can be triggered in ILM for the owners of the affected products to perform a review and remedy if necessary. ILM includes sandboxing functionality which allows you to compare substituting one benchmark for another (e.g. on a fund) and seeing the regulatory (and commercial) impact of such scenarios. ILM can also be used as a repository for the supporting documentation released with each benchmark such as the Benchmark Statement and Compliance Statements.
Once you have auditable processes running to manage your benchmark usage, you can then use ILM to generate regulatory reporting from its highly flexible reporting dashboards, which can then be exported and shared within your firm.
So while contemplating the challenges presented by the Benchmark Regulation, remember that technological solutions such as ILM can help turn what is otherwise a burden into an opportunity to improve your operational governance, product transparency, and of course, cost efficiency.
For more information on ILM and how MDSL can help your firm, please visit our ILM page
- Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1011&from=EN