ASIFMA Q&A: how Asia is facing the EU Benchmarks Regulation
Practice Insight speaks to John Ball, Asia Pacific managing director of GFMA’s global FX division, on
what the BMR means for non-EU benchmark providers and how the industry is preparing
The EU Benchmarks Regulation (BMR) attempts to introduce integrity and accountability to benchmarks.
In the UK Financial Conduct Authority’s words, it ‘aims to ensure benchmarks are robust and reliable, andto minimise conflicts of interest in benchmark-setting processes’.
Most remarkable about the new framework is its extraordinary extraterritorial reach. Once it’simplemented, EU market participants will only be able to use benchmarks that have received priorauthorisation from European regulators. Yet as it’s EU legislation, some non-EU administrators aren’t evenaware of its scope.
In February, the European Commission announced a formal two-year delay to full implementation of theBMR’s transition period until 2021 for critical and third country benchmark providers. This decision waswidely welcomed by the industry.
Here John Ball, managing director of the Global Financial Markets Association’s FX division for Asia Pacificspeaks to Practice Insight about the regulation’s scope, the risks it poses, and how third countries arereacting.
IFLR’s Practice Insight, a Euromoney product, analyses how financial institutions are reacting to capital
markets rules – from those on the inside. Our team uncovers regulatory-driven uncertainty within banks,
asset managers and trading venues on issues including – but not limited to – benchmark reform, MiFID II,
Brexit, prospectus rules, bank resolution and margin reform. Activate your free access: http://bit.ly/FreeAccess-PI
Practice Insight: What has happened since the European Commission conceded a two-year delay on theBMR?
John Ball: The additional two years have taken a lot of pressure off the market. A large number ofbenchmark administrators in Asia weren’t ready.
Obviously the BMR is EU legislation, but it has huge extraterritorial reach and for a lot of those affected inAsia – before ASIFMA and Herbert Smith Freehills started work – they were probably blissfully unaware iteven existed. Up until now the regulation of benchmarks outside of Europe was virtually non-existent, butthat is starting to change.

DEVELOPING ASIAN CAPITAL MARKETSThere is a group of third-country benchmark administrators that are incredibly important to European
supervised entities, in particular the investor community, and many firms in Europe are highly dependent
on being able to continue to use those benchmarks.
A significant portion of that group isn’t necessarily aware of how, where or how often their benchmarks
are used, and many don’t operate a commercial business model, unlike the large providers in developed
markets like Reuters, Bloomberg and S&P. Consequently, they haven’t had the same urgency orcommercial incentive to pursue any route of authorisation in Europe.
There are still some regulators and administrators in Asia that are of the view that this is a European pieceof legislation that doesn’t apply in their domestic market, so they don’t plan to respond in any way.
Benchmarks Regulation: non-EU admins running out of time
We continue to raise awareness of the consequences of the regulation among administrators andregulators. There are some countries have taken more formal steps: Australia passed legislation in June toregulate a number of local benchmarks - the S&P/ASX 200 Index, Consumer Price Index, AustralianInterbank Overnight Cash Rate, the Australian Bank Bill Swap Rate, and the ASX bond futures settlement
price.
In Japan, similar legislation has been passed but it only regulates Tibor [Tokyo interbank offered rate], andin Singapore only Sibor and SOR are regulated.
Under the BMR’s equivalence regime, any decision provided by the European Commission will only applyto domestic benchmarks that are regulated by local legislation. Consequently, an equivalence decision islikely to be quite specific and won’t cover all products traded in Europe, particularly by asset managers,
such as the Nikkei in Japan. Therefore, there will be an obligation on those third-country administrators tofind an alternative route to authorisation, via either endorsement or recognition. Those are the only twoother alternatives to achieving authorisation, and both require a legal representative in Europe who willtake on a legal liability for the production of the benchmark.
In Korea, there’s a piece of supervisory legislation currently with the National Assembly that will coversignificant domestic benchmarks. We won’t know exactly which benchmarks are included until thelegislation is passed.
Meanwhile, the Reserve Bank of India has recently released draft directions for a supervisory frameworkand the creation of a benchmark committee, which will be responsible for determining what is considereda significant domestic benchmark.
There are some jurisdictions – Taiwan and the US, for instance – that have said they won’t regulatedomestic benchmarks. In the US, it’s slightly different because many of the key domestic benchmark
administrators have affiliates in Europe to act as their legal representative, so the process of authorisation
for them is a lot simpler. If third-country administrators don’t have a European entity, the cost ofendorsement or recognition could be prohibitive – particularly for those who don’t operate a commercial

Page 2 of 5

business model – because the legal representative will need to be compensated for the legal liability theytake on.
Benchmarks Regulation: administrators don’t know they’re caughtWhat work are the industry associations doing to raise awareness and prepare the industry?
Via the Association of Financial Markets in Europe (AFME) and the International Swaps and Derivatives
Association (ISDA), we were active in lobbying the European Parliament and Council to extend thetransition period for third country benchmarks.
Fortunately, we had the support of other associations across Europe, particularly manufacturers who saw
this as significant for their members, many of whom hedge large foreign currency exposures usingproducts referencing third-country benchmarks. Because they bank locally in Europe, they wouldn’t havebeen able to continue trading those products with European supervised entities, and it is unlikely thatthey would set up a new relationship with a non-EU provider. They were quite vocal, which obviously
helped the industry’s position.
The BMR requires the European Commission to submit a report to the co-legislators – the Parliament andthe Council – initially by January 1 2020, but it’s now been pushed back to April 1.
In that report they’re obliged to review the functioning and effectiveness of the regulation and todetermine whether there is a need to amend it. We would expect that the effectiveness of the various
options for authorisation – endorsement, recognition and equivalence – will be part of that review.
We hope the Commission will recognise that neither endorsement nor recognition has gone according toplan. We have generally found the Commission responsive and proactive in trying to identify solutions forthird countries.
Market woefully unprepared for Benchmarks Regulation
A big part of the problem is that this is an extremely complex piece of regulation. For instance, many
third-country administrators still don’t have a detailed understanding of MiFID II (MiFID). Yet the BMR
references products that are traded on a trading venue (TOTV), submitted for TOTV, or traded via
systematic internaliser (SI), which are all MiFID terms. There are not many third-country administratorsthat know what an SI is.
On top of this, there are inconsistencies between the two regulations. Under MiFID, the SI regime exists
to create a level playing field between trading venues and investment firms. For instance, under MiFID, SIs
have greater price transparency obligations that only apply to products that are TOTV. Yet under the BMR,
any product that’s TOTV, admitted for TOTV, or can be traded via an SI – which includes products thataren’t TOTV – are in scope. The scope is that much wider.
When we were seeking guidance from the Commission, they suggested that because these products arein many cases inadmissible to TOTV, any SI who had registered as an SI for a particular class of products
should deregister to avoid being prohibited under BMR.
Page 3 of 5

That solution works for as long as there is no formal obligation to register as an SI. However, under MiFID,
at some point in the future, it will become compulsory for firms to register as an SI bringing theseproducts into scope. With no official register of SIs, it’s quite difficult for people to understand,particularly those with no experience with European legislation.
Read more on benchmark reform on Practice Insight
What was the reaction among Asian benchmark administrators when the Commission announced thedelay?
For those who were actively seeking authorisation, it has come as a relief. As an example, there areseveral key benchmarks in Hong Kong where the administrators are in the process of determining themost appropriate authorisation route. The Treasury Markets Association (TMA), for instance, is theadministrator for Hibor [Hong Kong ibor] as well as for the USD/CNH and USD/HKD exchange rates. These
are all quite widely used, so the extension takes the pressure off a bit.
It has also provided an opportunity for certain jurisdictions, such as Korea and India, to pass local
legislation to enable an equivalence decision. That’s a time-consuming process, so it’s great they haveboth started.
The granting of an equivalence decision is not without its challenges. Australia passed its benchmark
regulation in June 2018 and, along with Singapore, has only just been notified by the Commission of adraft equivalence decision. It all takes time. We understand that, going forward, the Commission will beconsidering the substance of the framework in place in third countries rather than its form, which will
hopefully make the process less onerous.
There are several authorised European entities that are considering or have already started to offer
endorsement services; I imagine they would have liked the regulation to have been implemented on time.
There is a risk involved in providing an endorsement service. There’s a significant legal liability arising fromthe administrator’s performance, so providers need rigorous oversight of the control and production of
the benchmark. That really means the administrator must cede control to the provider, which is generally
not popular with administrators. Plus, no two administrators operate in the same way, so the provider
needs to undertake due diligence on every benchmark individually.
It’s possible that EU regulators didn’t fully understand quite how far-reaching the extraterritorial impactof the regulation would be. It’s further complicated by differences in interpretation among the national
competent authorities in Europe – they are not all in agreement, which doesn’t help.
And then we have Brexit. That’s causing significant confusion because administrators don’t know if theyshould be applying to both the UK Financial Conduct Authority and another competent authority inEurope. In this sense the extension is fortuitous.

Page 4 of 5

ETF industry unconcerned by Libor reform
How the Benchmarks Regulation will stifle growth
The high-level concern we had with the encroaching deadline was threefold. First was the potential
impact on market liquidity and fragmentation. We had previously surveyed our members to understandthe use of non-deliverable foreign exchange forwards (NDF) in Europe and found that between 38% and
52% of global volumes traded in three Asian NDFs were traded by a European entity. If you exclude such alarge proportion of the market from trading those products, liquidity will suffer: market participants
won’t be able to trade with as many liquidity providers as before, and costs will go up.
There’s also a risk of fragmentation: if European entities can’t trade a third-country benchmark, will theylook for an alternative? That means potentially using different data points to calculate the benchmark
which introduces an element of basis risk.
If European supervised entities are suddenly prohibited from using third-country benchmarks, those withlocal onshore exposures can no longer hedge their currency or interest rate risk. Do those Europeanentities withdraw from those markets? If they do, will that have financial stability consequences?
We’re also concerned where Asian entities raise funding from EU-supervised entities using swaps basedon third-country benchmarks. Post-BMR, the EU-supervised entity will potentially be prohibited fromtrading those swaps, closing a source of funding.
Have those concerns been addressed?
Ultimately, we will have to wait for the result of the Commission’s review due in April 2020. Hopefully, aspart of this process they will consider simplifying the authorisation route, the role of the legal
representative or the scope of products covered. But before that, we -- along with other tradeassociations -- will be responding to the consultation the Commission has said it will undertake.
Special report: Libor reform

Page 5 of 5