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BMR Benchmark Regulation

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What is benchmark regulation?

Introduction to BMR - Benchmark Regulation
Following the Libor (London Inter-bank Offered Rate) scandal of 2012 in which it was discovered that various banks had been manipulating interest rates since 1991, the European Parliament and other bodies took steps to ensure strict and effective benchmark regulation.

Benchmark regulation is a regime for benchmark administrators that aims to guarantee the accuracy and integrity of benchmarks.

This took form in the Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 which became applicable starting from the 1st of January 2018. The regulation includes outlines for the overall responsibility of benchmark administrators, the quality of the benchmark, and accountability amongst others.

What is a benchmark?

A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured.
What's a benchmark ? (BMR)

What is a reference rate?

A reference rate is an interest rate benchmark used to set other interest rates.

Reference rates are useful in homeowner mortgages and sophisticated interest rate swap transactions made by institutions.
What's a reference rate ? (BMR)

What is Euribor?

The Euro Interbank Offer Rate is a reference rate that is constructed from the average interest rate at which eurozone banks offer unsecured short-term lending on the inter-bank market.

This is the benchmark rate with which banks lend or borrow excess reserves from one another over short periods of time with five current money market rates: the one-week, one-month, three-month, six-month, and 12-month rates.

Euribor money market rates - monthly

Euribor rates are an important benchmark for a range of euro-denominated financial products, including mortgages, savings accounts, car loans, and various derivatives securities.

A panel of 20 banks contribute to Euribor. These are the financial institutions that handle the largest volume of eurozone money market transactions. Find the full list here.

How to calculate Euribor rate ?
How is Euribor calculated?
Every day, at 10:45 AM, banks contributing to Euribor must put in a specific system the rates that the bank is willing to lend or borrow money for that day for the eight money market rates listed above. The highest and lowest 15% are discarded and the average of the rest is what makes the Euribor rate for that day.

What's the effect of Euribor rate ?
What is the effect of Euribor?
If the rate at which a bank can borrow money from another bank can increase or decrease, the bank will tend to increase/decrease the rates it offers to its clients, both the rates at which it borrows from private individuals and the rates at which it lends to companies and households.

What is Eonia?

The Euro Overnight Index Average is a daily reference rate that expresses the weighted average of unsecured overnight interbank lending in the European Union and the European Free Trade Association (EFTA). It is calculated by the European Central Bank (ECB) based on the loans made by 28 panel banks.

What is the difference between Euribor and Eonia?
Eonia is similar to Euribor with the difference that Eonia is an overnight rate, while Euribor is actually eight rates based on loans with maturities varying from one week to 12 months. The panel banks that contribute to the rates are also different.

How are benchmarks regulated?

The following bodies and regulations govern reference rates in Europe:

A. Relevant European laws and regulations:

In the European Union, the main regulation on benchmarks is the Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016. The aim of the legislation is to ensure the reliability of benchmarks and minimize conflicts of interest in benchmark-setting processes. EU BMR (as its colloquially known) builds on the IOSCO principles for financial benchmarks and applies to any benchmark used within the EU.

The regulation came into effect on January 1st, 2018.

B. IOSCO Principles for Financial Benchmarks:

In July of 2013 the International Organization of Securities Commissions (IOSCO) published its Principles for Financial Benchmarks setting out to articulate policy guidance and principles for Benchmark-related activities that will address conflicts of interest in the Benchmark-setting process, as well as transparency and openness when considering issues related to transition.

Here is a quick overview of the principles:
IOSCO - Administrator responsibility principleOverall Responsibility of the Administrator
IOSCO Principle - Oversight of 3rd partiesOversight of third parties
IOSCO Principle - Conflict of InterestConflicts of interest for Administrators
IOSCO - Control framework principleControl framework for Administrators
IOSCO Principle - Internal OversightInternal oversight

IOSCO Principle - Benchmark qualityQuality of the benchmark

IOSCO - Accountability principleAccountability
monitoring and reporting for financial institutionsIOSCO Principles

The Principles should be understood as a set of recommended practices that should be implemented by Benchmark Administrators and Submitters.

Benchmark Administrators should publicly disclose the extent of their compliance with the Principles annually. If implementation in any way deviates from the Principles, the Administrator should explain why it believes it meets the objectives and functions of the Principles, including to the extent they are relying on a proportionate view of the Principles.

Click here for the full document.

C. ESMA Benchmark Regulation:

The Regulation introduces a regime for benchmark administrators that ensures the accuracy and integrity of benchmarks. It is divided into two main parts – regulatory technical standards (RTS) and implementing technical standards (ITS).

Main points of the ESMA Benchmark regulation:
  • 1

    Improving governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately

  • 2

    Improving the quality of input data and methodologies used by benchmark administrators

  • 3

    Ensuring that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest

  • 4

    Protecting consumers and investors through greater transparency and adequate rights of redress

The Benchmarks Regulation introduces a code of conduct for contributors of input data requiring the use of robust methodologies and sufficient and reliable data. If an administrator does not comply with the provisions of the Benchmarks Regulation, the competent authority may withdraw or suspend its authorisation / registration.

ESMA coordinates the supervision of benchmark administrators by national competent authorities. The working group on euro risk-free rates was established by ESMA, European Central Bank (ECB), European Commission and the Belgian Financial Services and Markets Authority (FSMA) to identify and recommend risk-free rates that could serve as a basis for an alternative to current rates in the euro area, such as Eonia and Euribor.

For a list of areas where RTS and ITS standards are applied, click here.

D. The European Banking Authority:

The EBA is responsible for supervisory benchmarking exercises.

As part of these annual benchmarking exercises, the EBA collects feedback from institutions as regards the clarity of the benchmarking portfolios and reporting instructions, as well as from competent authorities as regards the relevance of the portfolios and the accuracy of benchmark values.

Feedback from institutions is mainly gathered through interviews with selected institutions and direct contact between institutions and competent authorities, while feedback competent authorities is shared with the EBA via a dedicated expert group dealing with the benchmarking of internal models.

The benchmarking results also provide banks with valuable information on their risk assessments compared with other banks' assessments of comparable portfolios.

Each year it issues an ITS package for the benchmarking exercises. Click here to find the latest one. It must be submitted by the 11th of November.

Click here to find an explanation of the reporting.

What are the sanctions for non-compliance to BMR?

The infringement of Benchmark Regulation may lead to a cease and desist order for the administrator, a public warning indicating the administrator or the supervised entity responsible for the infringement, a withdrawal or suspension of the authorisation or registration of the administrator, and a temporary ban exercising management functions in administrators.

There are also pecuniary sanctions, including EUR 1.000.000 or the corresponding value in the national currency on 30 June 2016, or 10 % of the administrator’s total annual turnover for infringements of certain articles; or either EUR 250.000 or the corresponding value in the national currency on 30 June 2016, or 2 % of its total annual turnover for the infringement of others.

What are other reference rates?

There are a set of different reference rates that work similarly to Euribor. In Europe one may find local reference rates such as Stibor (Sweden), Pribor (Czech Republic), and Bubor (Hungary). Internationally some major reference rates include Tibor (Japan), Hibor (Hong Kong), and Shibor (China).

Libor, U.K.’s reference rate mentioned earlier, is a primary benchmark or short-term interest rates around the world and is used prominently in U.S. derivatives markets. It is calculated for 5 currencies: EUR, USD, GBP, JPY, and CHF. However, as of the end of 2021, Libor is expected to be discontinued due to the underlying market that it seeks to measure being no longer sufficiently active.

Proposed alternatives to the Libor include the Secured Overnight Financing Rate (SOFR) for the U.S. dollar, the Sterling Overnight Index Average (SONIA) for British pounds, and the Euro Short-Term Rate (€STR) for the euro.
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