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Benchmark RegulationIntroduction
November 2016
1 Introducing the Benchmark Regulation
Timeline and deadlines
Regulated activities
Categories and types of benchmarks
Administrators of benchmarks
Contributors and users of benchmarks
Third country regime
Table of contents
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Impact on your business8
Here’s how we can help you9
Introducing Synechron10
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Introducing the Benchmark Regulation
It is considered necessary to ensure the accuracy, robustness and integrity of benchmarks and of the benchmark determination process.Failing integrity of benchmarks can: Undermine market confidence Cause losses to consumers and
investors Distort the real economy
Introduction
Main objectives
On 30 June 2016, the EU Regulation on indices used as benchmarks in financial instruments (Benchmark Regulation or BMR) entered into force. Its creation was a response to past manipulation of different types of benchmarks, the most publicised of which has been the LIBOR scandal. The new rules are aimed at improving the governance of such benchmarks produced and used in the EU in financial instruments such as bonds, shares and derivatives. Most provisions of the new EU regulation will apply from 1 January 2018. Some provisions, such as those on mandatory administration and contribution to critical benchmarks, are already applicable.
Drivers
Improving governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately
1Ensuring that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest;
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Improving the quality of input data and methodologies used by benchmark administrators;
3Protecting consumers and investors through greater transparency and adequate rights of redress;
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Timeline and deadlines
2016 2018
Q1 Q4Q3Q2 Q1 Q4Q3Q2 Q1 Q4Q3Q2
Late 2017End of objection and amendment period and expected date of publication of RTS/ITS by the EC
30 June 2016 Entry into force of BMR. Twenty provisions in level 1 BMR text apply directly.
2017
12 August 2016EC designates Euro Interbank Offered Rate (EURIBOR) as critical benchmark
1 January 2018BMR applies in full
1 April 2017Deadline to submit final draft technical standards for ESMA
1 January 2020End of transitional period for existing index providers
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29 September 2016ESMA publishes draft regulatory and implementing technical standards (RTS/ITS)
27 May 2016ESMA publishes a consultation paper on its draft implementing measures
ESMA to draft BMR RTS
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ScopeAdministrators having control over the provision of a benchmark, meaning:a) administering the arrangements for determining a benchmark;b) collecting, analysing or processing input data to determine a
benchmark; c) determining a benchmark through the application of a formula or
other method of calculation or by an assessment of input data provided;
Contributors of input data, meaning:the provision of any input data that is required to determine a benchmark and that is not (directly or indirectly) readily available to an administrator.
Users of a benchmark who:a) issue a financial instrument which references an indexb) determine the amount payable under a financial instrument or
contract by referencing an index;
c) are party to a financial contract which references an index;d) provide a borrowing rate calculated as a spread or mark-up over
an index;e) measure the performance of an investment fund through an
index.
Regulated activitiesIn
put
Dat
a Contributor
Contributor
Contributor
Index
administrator
Calc
ulat
ion
Dis
sem
inat
ion
Benchmarkusers U
se o
f in
form
atio
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Categories and types of benchmarks
*‘benchmark’ means 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;
The legislator has categorised benchmarks into critical, significant and non-significant, each with different requirements.
Three categories of benchmarks*
Critical benchmark
s
Significant benchmark
sNon-significant
benchmarks
Four types of benchmarks*In addition a distinction is made between interest rate, commodity, regulated-data and other benchmarks.
Regulated-data
benchmarks
Interest rate
benchmarks
Commodity benchmark
s
Otherbenchmark
s
Critical benchmarks Significant benchmarks Non-significant benchmarks
Mandatory requirements (Partly) RTS exempted; Comply or explain requirements
Compliance requirementsThe three specific types of benchmarks have their own distinct set of requirements, including, among others, the following: Interest rate benchmark: prioritisation requirements for input
data from actual transactions in the underlying market, establish independent oversight committee, independent external compliance audit;
Commodity benchmarks: prioritise input data from concluded and reported transactions, specify criteria defining a commodity, specific rules for assessors, (non)-significant regime cannot apply, compliance audit;
Regulated-data benchmark: Certain governance, and control requirements on input data and record-keeping obligations do not apply.
Compliance requirements
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Mandatory administration of critical benchmarks The relevant competent authority may require mandatory administration of a critical benchmark in order to preserve the existence of the
benchmark in question.
Methodology for determining benchmarks Requirement to adopt a transparent
methodology that ensures the benchmark's reliability and accuracy.
This does not mean the publication of the formula applied for the determination of a given benchmark, but rather the disclosure of elements sufficient to allow stakeholders to understand how the benchmark is derived and to assess its representativeness, relevance and appropriateness for its intended use.
Governance and control requirements Robust governance arrangements with well-
defined, transparent and consistent roles and responsibilities
Arrangements to identify and prevent or manage conflicts of interest
Effective oversight function to oversee all aspects of the provision of benchmarks
Effective control framework Accountability framework covering record
keeping, audit, review and complaints Establish a code of conduct, for benchmarks
based on input data from contributors
Administrators of benchmarksRequirements for administrators of benchmarks
Publish benchmark statements An administrator should publish a
benchmark statement specifying what a given benchmark intends to measure and its susceptibility to manipulation
Authorisation and registration of administrators Authorisation if administrator provides indices
which are (intended to be) used as benchmarks;
Registration if administrator is a supervised entity, other than an administrator, that provides indices which are used as (non-critical) benchmarks
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Contributors and users of benchmarks
Requirements forBenchmark contributors
Compliance with codes of conduct as established by the relevant benchmark’s administrator
Ensure quality of input data (supervised contributor)
Prevent conflicts of interest Implement control framework
Mandatory contribution to critical benchmarks
Requirements forBenchmark users
Supervised entities* may only use benchmarks provided by authorised or registered administrators
Supervised entities are regulated credit institutions, investment firms, (re)insurance undertakings, UCITS, AIFMs, occupational retirement institutions, regulated (non-) creditors for the purposes of credit agreements, market operators, CCPs, trade repositories and administrators
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Third country regime
Users can only use benchmarks provided by administrators not located in the EU under the following regimes:
The third country administrator and benchmark are included in the ESMA register. The following conditions apply:
An equivalence decision adopted by the Commission, ensuring that the regulatory and supervisory framework of the third country is equivalent to that provided under the EU Benchmark Regulation
The administrator is authorised or registered and supervised in the third country
ESMA is notified by the administrator that its benchmarks may be used by EU supervised entities; and
There is a cooperation agreement in place between ESMA and the third country competent authority
EquivalenceUntil an equivalence decision has been made, a third country administrator may apply for recognition by the competent authority of the Member State in which it wishes to provide its benchmark.
In order to be eligible to recognition, the administrator will have to apply with a large part of the Benchmark Regulation’s requirements.
RecognitionAn authorised or registred administrator located in the EU may apply to endorse benchmarks provided in a third country.
The endorsing administrator will have to have a clear and well-defined role within the control or accountability framework of the third country administrator.
Endorsement
Impact on your businessChallenges and next steps to implement BMR
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Oversight function
Governance and conflicts of interests
Establish and set up: robust governance arrangements, a clear organisational
structure with well-defined transparent consistent roles and responsibilities for those involved
arrangements to identify and prevent or manage conflicts of interest and to ensure independent and honest exercise of any judgment or decision
manage conflicts of interest and separate business that could result in a conflict of interest
Policies, procedures and code of
conduct
Control framework and audit
Establish, review and update as a appropriate: a control framework ensuring compliant provision
and publication of benchmarks; procedures to make such a framework available to
regulators and, where requested, users
Record keeping
comply with record-keeping obligations, e.g. on methodology, used data, decisions made and deviations from standard procedures;
retention period of five years
Disclosure and
transparency
Develop, operate and administer transparently: a robust, reliable, rigorous and continuous
methodology that has clear rules identifying how and when discretion may be exercised and is capable of validation including back-testing against available transaction data
Establish, operate and have in place: adequate policies and procedures for overall
compliance (e.g. oversight and infringements); an accountability framework covering record-
keeping, auditing and review and a complaints process, evidencing compliance with BMR;
develop a code of conduct for each benchmark on contributors' responsibilities on input data;
Develop, establish and maintain: a permanent and effective oversight function ensuring
oversight of all aspects of benchmarks provision; robust procedures regarding their oversight function and
make this available to the relevant regulators; monitor input data en report to the relevant competent
authority any conduct that may involve (attempted) manipulation
The capacity in which your organisation is acting – Administrator, contributor or user;The category of benchmark – Critical, significant or non-significant; andThe type of benchmark – Interest rate, commodity, regulated-data or other benchmark
The impact and application of different requirements of the BMR depends on a number of factors
Here’s how we can help youDigital / Business Consulting /
Technology
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Tailor-made compliance with BMR, affiliated regulations and soft law provisionsProven approach for regulatory challenges
We have the right resources and tools to bringing your organisation up to par with the Benchmark Regulation
GAP assessment of as-is state: Overview of the gaps between the current business practices of the company an the relevant European and national regulatory requirements on benchmarks
Impact analysis on future rules: Overview of the impact of regulations that are and will become applicable in the near future (e.g. BMR, RTS/ITS, 2013 IOSCO Principles for Financial Benchmarks, national legislation et cetera)
Implementation and application - Full and ongoing compliance: Remediation of the gaps found during the gap assessment, implementation of the organisational framework including policies and procedures drafting if needed, and IT and digital infrastructure
Achieving synergies in tomorrow’s regulatory frameworkWe look at the bigger picture
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Benchmark Regulation
MAD / MAR
Trade venues must include benchmark names and their administrators when sending notifications of admitted financial instruments to regulators
Exempted regime for manager transactions
Prospectus
regulation
Ensure that prospectuses for investment products referencing benchmarks include clear and prominent information stating whether the benchmark is provided by an administrator
UCITS Underlying documents of UCITS
prospectuses approved before 1 January 2018 must be updated within 12 months after that date
CCD
MCD
For credit agreements referencing a benchmark. the name of the benchmark and of its administrator and the potential implications on the consumer shall be provided by the creditor in a separate document
At Synechron, we believe it is key to fully take into account the broad financial regulatory horizon when looking at ways to implement solutions and becoming compliant with the Benchmark Regulation. Indeed, some of the largest and most impactful post-crisis regulations include topics (e.g. record-keeping under MiFID 2) that partially or fully overlap with BMR, as is demonstrated below. This provides for ample opportunities to achieve synergies during the implementation process.
A successful implementation project is more than just being compliant
Where mortgage contracts reference a benchmark, the name of the benchmark and its administrators must be included
Overlapping record-keeping requirements provide for cost synergy opportunities;
Solutions for overlapping topics such as the control framework, oversight, conflicts of interest, disclosure and transparency should, where possible, be defined and implemented simultaneously;
The rights on non-discriminatory access for CCPs and trading venues under MiFID 2 will also extend to benchmark Regulation on wholesale energy market integrity and transparency (No 1227/2011);
IOSCO principles for Financial Benchmarks;
IOSCO principles for Oil Price Reporting Agencies
Soft law and
sector specific
rules
MiFID 2
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Our success stories (1/3)We are well-versed in relevant legislation and driven by a change management
perspective
Business context
Approach
Result
Dodd-Frank act and EMIR implementationA large international bank with presence in the United States sought the assistance of Synechron with the implementation of Dodd-Frank and EMIR from legal, operational, and technical perspective. The key requirement was to design a reporting framework for buy-side clients and end-users. Other compliance objectives related to rules around registration, collateral & risk management, mandatory clearing, internal & external business conduct.A Dodd-Frank assessment showed many similarities with EMIR. Synechron advised the client to start with Dodd Frank and integrate the requirements with EMIR at a later stage when rules were finalised. A rule management function was established, supported by legal expertise for each jurisdiction. Synechron developed a reporting tool to interface the front-office systems and the trade repository based on both legal and business requirements. Our knowledge and experience of both Dodd Frank and EMIR resulted in a project that continuously maintained a helicopter view leading to an integrated solution. Our client is currently compliant with the first requirements of Dodd-Frank and EMIR. Synechron was an important link between the departments involved including legal, compliance, risk, front and back office. The changing project scope did not deter the project from achieving its compliance objectives.
As a result of a number of scandals (i.a. Libor), fines and media scrutiny surrounding financial benchmarks, a large bank was looking to strengthen its risk and control framework for benchmarks in the Financial Markets department. The main goal of the project was to identify, manage and mitigate the main risks and to reinforce supervision.
The chosen approach was to make an analysis of all benchmarks used and mapping trading processes, risks and controls. This was done in collaboration with all stakeholders, through workshops and interviews. It resulted in an up-to-date risk and control framework, fully aligned with the three lines of defence.
Synechron delivered a clear mapping of current processes, and updated risk and control framework, including a new benchmark policy and newly defined controls. In addition, we ensured that the updated framework and policy were embedded within the organisation through awareness and training sessions for all staff involved.
Financial Benchmark Risk & Control Framework
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Our success stories (2/3)We are well-versed in relevant legislation and driven by a change management
perspectiveMiFID 2 gap analysis & coordination
Business context
Approach
Result
A large international bank asked Synechron for assistance with the implementation of MiFID 2. A bank wide multi-year programme was set up to ensure timely compliance in an increasingly strict regulatory landscape. With a team of 9 Synechron consultants, assistance was provided to all four business lines of the bank, both on the coordination of the gap analysis phase, as well as the analysis of the MiFID 2 implications. Synechron was responsible for analysing the current business practices, developing a solution approach and coordinating the analysis phase. This was done in close collaboration with stakeholders in the business, Legal, Compliance and other parts of the bank impacted by MiFID 2. Synechron presented solution directions by establishing an impact analysis of the regulation on the bank’s value chain.
Synechron delivered a high-level analysis of how MiFID 2 impacts the Target Operating Model of the bank. Solution types concerning the bank’s Strategy, IT, Policies, and Controls were defined. The chosen approach resulted in meeting the multi-year Programme’s deadlines, despite the general lack of time availability from stakeholders in the business.
As part of the core MiFID 2 project team of an international bank offering clearing and Direct Electronic Access services, Synechron is providing subject matter expertise and is taking the lead in the gap and solutioning design analysis. Advise and support was provided with regard to both the approach and governance of the programme, as well the interpretation of the rules, i.e. translating the regulation to clear business requirements.As part of the core project team, Synechron ensured close alignment with the business, Legal and Compliance during the analysis phase. In order to ensure global compliance, local entities were involved from the start and supported from the head office with both analysis and guidance. A pragmatic approach was taken to ensure compliance through the use of efficient solutioning documentation, sufficient to ensure alignment with all parts of the business. The chosen approach resulted in a clear translation from the current business practices and MiFID 2 requirements to the gaps and solutions. Detailed gap reports and solutioning designs have been delivered as well as memo’s on the interpretation of the regulation. As a result, the bank is currently globally on track to meet the compliance deadline of 3 January 2018.
MiFID 2 regulatory guidance & analysis
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Our success stories (3/3)We are well-versed in relevant legislation and driven by a change management
perspective
Business context
Approach
Result
Client clearing model implementation
Our client, a buy-side bank, asked Synechron to help them implement a client clearing model (model T4) for their Interest Rate Swap (IRS) portfolio in order to comply with EMIR. EMIR required all OTC derivatives contracts to be cleared through central counterparties before the end of 2012. The client clearing model would further help to obtain collateral relief by netting existing collateral requirements.
Synechron was directly involved from the initiation phase of the project and played a leading role. A mixed project team, consisting of the bank’s internal employees and Synechron specialists, was set up to deliver the implementation. The following key deliverables were realised in this project: 1) Legal client documentation 2) Connectivity to MarkitWire 3) Collateral process 4) Back loading of the existing portfolio.Synechron's drive, knowledge and structured approach ensured that the client’s clearing model was implemented successfully within a timeframe of five months. This was the first time such client clearing implementation took place in the bank’s home location. Collateral relief was successfully obtained since collateral that was previously spread amongst IRS counterparties could now be netted. Next to that, our client is now compliant to the future EMIR regulation.
A large bank aimed to move from a standardized regulatory capital model to an internal model that would reduce their capital. The bank was already managing its main risks on their internal VaR model. However the upgrade of the VaR model and reporting for regulatory purposes, raised the requirements on scope, documentation, and validation.
Synechron assisted the modelling team by including some specific, but more exotic risks in the VaR model in a consistent way. These risks included commodity, inflation and dividend risk. The models were designed, back-tested and documented. Also Synechron provided quality assurance through an in-depth review on the full model documentation, before sign-off by senior management.
The models for commodity risk and inflation have been approved and implemented. An indirect result of the model for dividend risk was that much higher capital was required for this business than expected and the business case was reconsidered with a negative outcome. The VaR model is currently undergoing the 6-month parallel run required for approval by the regulator.
Basel 2 market risk
Introducing SynechronDigital / Business Consulting /
Technology
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SynechronDigital / Business Consulting / Technology
1000 400
1504000
150
FOUNDED IN 2001 $350+mn
REVENUE16 GLOBAL LOCATIONS
5,500+ ASSOCIATES
260+ACTIVE CLIENTS
+25% Y-o-Y GROWTH
$1BCOMPANY
VALUATION
Synechron is a global consulting and technology organisation providing innovative solutions tothe financial services industry through its three main business focus areas: digital, business consulting, and technology.
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Quick overview of Synechron Business ConsultingWe differentiate ourselves as financial services change
specialists
We guide financial institutions through the process of change with offices in New York, Charlotte, London, Amsterdam, UAE, Pune, Singapore & Hong Kong
8offices
We are experts in translating strategy into operating models, defining implementation roadmaps, and managing the end-to-end delivery process with a team of 180+ highly motivated consultants
180+staff
We help our clients to deliver transformational change, implement agile turnarounds, drive business benefits on the back of regulatory challenges, and advise in new venture set-ups
deliver
Synechron, a global company with over 5,500+ professionals, is headquartered in New York. It provides state-of-the-art IT services, products, and business processing solutions. Together with Synechron, Synechron Business Consulting can provide end-to-end services for our clients.
We have deep functional expertise and have delivered successful turnarounds for our clients for over 13 years across the globe
13years
We have built long lasting partnerships with over 50 leading names across the Investment Banking, Private Banking, Asset Management, and Insurance sectors
50+clients
We train our Consultants and Clients on all relevant financial services topics: www.synechrontraining.com learn
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Our consulting approachDriving business solutions through our industry experience
We support our clients in successfully translating business strategy into organisational design, optimised business processes and technology solutions across the value chain and business areas. Our in depth industry knowledge and collaborative approach result in effective and commercially relevant solutions.
We always take our client’s business context as the starting point of every engagement. Adding our industry experience and best practices as the core element at the start and throughout our client projects ensures that we are effective and efficient from Day 1.
Close collaboration with our clients from the beginning of any engagement ensures that the transition from project to the client’s BAU operations is as smooth as possible, and the intended changes and business results are embedded going forward.
Strategic analysis and operating model definition
Ability to work across the entire value chain
Business case driven and fact based decision-making
Portfolio, Program and Project Management to deliver business results
Drive best practice from our industry experience
Deliver tailor-made solutions to maximise client value
Strategy Translatio
n
Business Results
Tailor-Made
Solutions
WholesaleBanking
Investment Banking
Private Banking
TransactionBanking
Asset Manageme
nt
Financial
Services
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Content-driven consultingCore practice areas supporting our excellent consulting capabilities
In order to facilitate our consulting engagements and to ensure that we are always on the top of our game in terms of content, we have dedicated teams in place who develop, maintain, distribute and educate on all key topics in financial markets today.
These practices support all of our projects with content, trends, methodologies, best practices and the practical translation of industry-wide topics.
In addition, the knowledge developed in these practices is translated into white-papers, point of views, educational materials, training courses and books to ensure the best possible transfer of knowledge to our clients and consultants.
Our training institute provides training on all core topics to internal and external clients by delivering bespoke and standardised (certified) training courses across all locations.
CONFERENCES &
ROUNDTABLES
TREND ANALYSIS
METHODOLGIES & APROACHES
TRAINING & EDUCATION
PUBLICATIONS & POINT OF VIEWS
Strategy & Operations
Best-shoring
Digital Banking
Finance, Risk and Control
Regulatory
Data & Architecture
IT Effectiveness
Client Lifecycle Management
Financial Crime
Core
Glo
bal P
ract
ice
Area
s
Want to know more?Contact one of our regulatory experts
Joris [email protected] +31 (0) 20 697 19 59Alphatower, De entree 15-17 1st floor 1101 BH AmsterdamThe Netherlands
Can [email protected] +31 (0) 20 697 19 59Alphatower, De entree 15-17 1st floor 1101 BH AmsterdamThe Netherlands
Willem den [email protected] +31 (0) 20 697 19 59Alphatower, De entree 15-17 1st floor 1101 BH AmsterdamThe Netherlands
