Benchmark Regulation: Update of ESMA’s Q&A

As a reminder, the Benchmark Regulation (Regulation (EU) 2016/1011) (“BMR”) has been applicable since 1 January 2018.

In a recent update of its Q&A on the BMR, ESMA has added new questions and answers with respect to net asset values (NAVs) of investment funds (UCITS and AIFs) and written continuity plans, amongst other things.

According to ESMA, the NAVs of investment funds do not qualify as indices or benchmarks within the meaning of BMR, but can be used as input data of benchmarks. The BMR specifically refers to NAVs of investment funds as potential input data for regulated-data benchmarks. ESMA concludes that investment funds providing NAVs for regulatory purposes should therefore be considered as potential input for regulated-data benchmarks and not as providers of benchmarks. If an investment fund acts as contributor of data of one or more indices or benchmarks, it may be subject to the requirements of the BMR which apply to contributors of input data.

According to the BMR, supervised entities (which include UCITS ManCos and AIFMs) that make use of one or more benchmarks shall produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided. ESMA states that those written plans are robust (i) if they determine operational procedures in writing and (ii) if they include detailed courses of action, relevant communication channels and arrangements for different scenarios and contingencies. ESMA adds that written plans should be thorough and adequate. They should reflect the nature and size of the individual benchmark and the scale of its use in the markets. ESMA further considers that supervised entities should continuously monitor relevant factors and update arrangements as appropriate.

Information on those written plans must be provided by benchmark users in the contractual relationship with their clients. ESMA admits that these contractual relationships are governed by national contract law and that, accordingly, the legally adequate reflection of the written plans may vary among Member States. ESMA lists prospectuses of investment funds as possible contractual documents under national law which can be updated. In other cases, ESMA suggests that supervised entities opt to include a reference to their written plans in other contractual documents that they formalise with new investors.