P8_TA(2015)0195

Indices used as benchmarks in financial instruments and financial contracts ***I

Amendments adopted by the European Parliament on 19 May 2015 on the proposal for a regulation of the European Parliament and of the Council on indices used as benchmarks in financial instruments and financial contracts (COM(2013)0641 — C7-0301/2013 — 2013/0314(COD)) (1)

(Ordinary legislative procedure: first reading)

(2016/C 353/22)

[Amendment No 1]

AMENDMENTS BY THE EUROPEAN PARLIAMENT (*)

to the Commission proposal

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on indices used as benchmarks in financial instruments and financial contracts

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Economic and Social Committee (2),

Having regard to the opinion of the European Central Bank (3),

Acting in accordance with the ordinary legislative procedure,

Whereas:

(1) The pricing of many financial instruments and financial contracts depends on the accuracy and integrity of benchmarks. Serious cases of manipulation of interest rate benchmarks such as LIBOR, EURIBOR, as well as foreign exchange benchmarks, causing considerable losses to consumers and investors and further shattering the confidence of citizens in the financial sector, as well as allegations that energy, oil and foreign exchange benchmarks have been manipulated, demonstrate that benchmarks can be subject to conflicts of interest and have discretionary and weak governance regimes that are vulnerable to manipulation. Failures in, or doubts about, the accuracy and integrity of indices used as benchmarks may undermine market confidence, cause losses to consumers and investors and distort the real economy. It is therefore necessary to ensure the accuracy, robustness and integrity of benchmarks and the benchmark setting process.

(2) Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (4) contains certain requirements with respect to the reliability of benchmarks used to price a listed financial instrument. Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (5) contains certain requirements on benchmarks used by issuers. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (6) contains certain requirements on the use of benchmarks by UCITS investment funds. Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity (7) contains certain provisions which prohibit the manipulation of benchmarks that are used for wholesale energy products. However these legislative acts only cover certain aspects of certain benchmarks and do not address all the vulnerabilities in the process of producing all benchmarks.

(3) Benchmarks are vital in pricing cross-border transactions and thereby facilitating the effective functioning of the internal market in a wide variety of financial instruments and services. Many benchmarks used as reference rates in financial contracts, in particular mortgages, are produced in one Member State but used by credit institutions and consumers in other Member States. In addition, these credit institutions often hedge their risks or obtain the funding for granting these financial contracts in the cross border interbank market. Only two Member States have adopted national legislation on benchmarks, but their respective legal frameworks on benchmarks already show divergences regarding aspects such as the scope of application. In addition, the International Organisation Securities Commissions (IOSCO) ▌ agreed principles on benchmarks in 2013 and, since those principles provide a certain flexibility as to their exact scope and means of ▌ implementation ▌, Member States are likely to adopt legislation at national level which would implement such principles divergently.

(3a) The use of financial benchmarks is not limited to the issuance and creation of financial instruments and contracts. The financial industry also relies on benchmarks for the assessment of the performance of an investment fund for the purpose of return tracking, of determining the asset allocation of a portfolio, or of computing the performance fees. The setting and review of the weights to be assigned to various indices within a combination of indices for the purpose of determining the pay-out or the value of a financial instrument or a financial contract, or measuring the performance of an investment fund, also amounts to use, as such an activity does not involve any discretion as opposed to the activity of the provision of benchmarks. The holding of financial instruments referencing a particular benchmark should not to be considered to be use of the benchmark.

(4) These divergent approaches would result in fragmentation of the internal market since administrators and users of benchmarks would be subject to different rules in different Member States . Thus, benchmarks produced in one Member State could be prevented from being used in other Member States. In the absence of a harmonised framework to ensure the accuracy and integrity of benchmarks used in financial instruments and financial contracts in the Union it is therefore likely that differences in Member States legislation will create obstacles to the smooth functioning of the internal market for the provision of benchmarks.

(5) EU consumer protection rules do not cover the particular issue of the suitability of benchmarks in financial contracts. As a result of consumer complaints and litigation relating to the use of unsuitable benchmarks in several Member States, it is likely that divergent measures, inspired by legitimate concerns of consumer protection, would be adopted at national level, which could result in fragmentation of the internal market due to the divergent conditions of competition attached to different levels of consumer protection.

(6) Therefore to ensure the proper functioning of the internal market and improve the conditions of its functioning, in particular with regard to financial markets, and to ensure a high level of consumer and investor protection, it is therefore appropriate to lay down a regulatory framework for benchmarks at Union level.

(7) It is appropriate and necessary for those rules to take the legislative form of a Regulation in order to ensure that provisions directly imposing obligations on persons involved in benchmark production, contribution and use are applied in a uniform manner throughout the Union. Since a legal framework for the provision of benchmarks necessarily involves measures specifying precise requirements on all different aspects inherent to the provision of benchmarks, even small divergences on the approach taken regarding one of these aspects could lead to significant impediments in the cross border provision of benchmarks. Therefore, the use of a Regulation, which is directly applicable without requiring national legislation, should reduce the possibility of divergent measures being taken at national level, and should ensure a consistent approach, greater legal certainty and prevent the appearance of significant impediments in the cross-border provision of benchmarks.

(8) The scope of this Regulation should be as broad as necessary to create a preventive regulatory framework. The production of benchmarks involves discretion in their determination and is inherently subject to certain types of conflicts of interest, which implies the existence of opportunities and incentives to manipulate those benchmarks. These risk factors are common to all benchmarks, and all of them should be made subject to adequate governance and control requirements. The degree of risk, however, varies, and the approach adopted in each case should therefore be tailored to the particular circumstances. Since the vulnerability and importance of a benchmark varies over time, restricting the scope by reference to currently important or vulnerable indices would not address the risks that any benchmark may pose in the future. In particular, benchmarks that are currently not widely used may be so used in the future, so that, in their regard, even a minor manipulation may have significant impact.

(9) The critical determinant of the scope of this Regulation should be whether the output value of the benchmark determines the value of a financial instrument or financial contract▌. Therefore the scope should not be dependent on the nature of the input data. Benchmarks calculated from economic input data, such as share prices and non-economic number or values such as weather parameters should thus be included. The framework should cover those benchmarks subject to these risks, but should also acknowledge the existence of the large number of benchmarks provided around the world and the different impact that they have on financial stability and the real economy. This Regulation should also provide for a proportionate response to the risks that different benchmarks pose. This Regulation should therefore cover all benchmarks which are used to price financial instruments listed or traded on regulated venues. All references to days in this Regulation should mean calendar days.

(10) A large number of consumers are parties to financial contracts, in particular consumer credit agreements secured by mortgages, that reference benchmarks that are subject to the same risks. This Regulation should therefore cover the indices or reference rates referred to in Directive 2014/17/EU of the European Parliament and of the Council (8).

(11) An index or combination of existing indices in which no new input data is included and which is used to measure the performance of a fund or a financial product should be considered to be use of a benchmark.

(12) All benchmark administrators are potentially subject to conflicts of interest, exercise discretion and may have inadequate governance and control systems in place. Further, as administrators control the benchmark process, requiring authorisation and supervision or registration of administrators is the most effective way of ensuring the integrity of benchmarks.

(13) Contributors are subject to potential conflicts of interest, exercise discretion and so may be the source of manipulation. Contributing to a benchmark is a voluntary activity. If any initiative requires contributors to significantly change their business models, they may cease to contribute. However, for entities already subject to regulation and supervision, requiring good governance and control systems is not expected to lead to substantial costs or disproportionate administrative burden. Therefore this Regulation imposes certain obligation on supervised contributors.

(14) An administrator is the natural or legal person that has voluntary control over the provision of a benchmark, in particular who administers the benchmark, collects and analyses the input data, determines the benchmark and either directly publishes the benchmark or outsources its publication to a third party . However, where a person merely publishes or refers to a benchmark as part of his or her journalistic activities but does not have control over the provision of that benchmark, that person should not be subject to the requirements imposed on administrators by this Regulation.

(15) An index is calculated using a formula or some other methodology on the basis of underlying values. Discretion exists in constructing this formula, performing the calculation or determining the input data. This discretion creates a risk of manipulation and therefore all benchmarks sharing this characteristic should be covered by this Regulation. However where a single price or value is used as a reference to a financial instrument, for example where the price of a single security is the reference price for an option, there is no calculation, input data or discretion. Therefore single price or single value reference prices should not be considered benchmarks for the purposes of this Regulation. Reference prices or settlement prices produced by Central Counterparties (CCPs) should not be considered benchmarks because they are used to determine settlement, margins and risk management and thus do not determine the amount payable under a financial instrument or the value of a financial instrument.

(16) The independence of the European Central Bank and of the national central banks of the European System of Central Banks in the performance of their powers, tasks and duties conferred on them by the Treaties, as well as the independence of national central banks inherent in the constitutional structures of the Member State or third country concerned, should be fully respected in the implementation of this Regulation.

(17) ▌In order to ensure the integrity of benchmarks, benchmark administrators should be required to implement adequate governance arrangements to control these conflicts of interest and to safeguard confidence in the integrity of benchmarks. Even where effectively managed, most administrators are subject to some conflicts of interest and may have to make judgements and decisions which affect a diverse group of stakeholders. It is therefore important that administrators have an independent function to oversee the implementation and effectiveness of the governance arrangements that provide effective oversight.

(18) The manipulation or unreliability of benchmarks can cause damage to investors and consumers. Therefore, this Regulation should set out a framework for retention of records by administrators and contributors as well as providing transparency about a benchmark's purpose and input data which facilitates more efficient and fairer resolution of any potential claims in accordance with national or Union law.

(19) Auditing and the effective enforcement of this Regulation requires ex post analysis and evidence . This Regulation should therefore set out a framework for adequate recordkeeping by benchmark administrators relating to the calculation of the benchmark for a sufficient period of time. The reality that a benchmark seeks to measure and the environment in which it is measured are likely to change over time. Therefore it is necessary that the process and methodology of the provision of benchmarks are audited or reviewed on a periodic basis to identify shortcomings and possible improvements. Many stakeholders may be impacted by failures in the provision of the benchmark and can help identify these shortcomings. This Regulation should therefore set out a framework for the establishment of an independent complaints procedure by administrators to enable stakeholders ▌ to notify the benchmark administrator of complaints and ensure that the benchmark administrator objectively evaluates the merits of any complaint.

(20) The provision of benchmarks frequently involves the outsourcing of important functions such as calculating the benchmark, gathering the input data and disseminating the benchmark. In order to ensure the effectiveness of the governance arrangements, it is necessary to ensure that any such outsourcing does not relieve a benchmark administrator of any of its obligations and responsibilities, and is done in such a way that it does not interfere with either the administrators ability to meet these obligations or responsibilities, or the relevant competent authority’s ability to supervise them.

(21) The benchmark administrator is the central recipient of the input data and is able to evaluate the integrity and accuracy of this input data on a consistent basis.▌

(22) Employees of the administrator may identify possible breaches of this Regulation or potential vulnerabilities that could lead to manipulation or attempted manipulation. This Regulation should therefore put in place a framework to enable employees to alert administrators confidentially of possible breaches of this Regulation.

(23) Any discretion that can be exercised in providing input data creates an opportunity to manipulate a benchmark. Where the input data is transaction based data, there is less discretion and therefore the opportunity to manipulate the data is reduced. As a general rule benchmark administrators should therefore use actual transaction input data where possible but other data may be used in those cases where the transaction data is insufficient to ensure the integrity and accuracy of the benchmark.

(24) The accuracy and reliability of a benchmark in measuring the economic reality it is intended to track depends on the methodology and input data used. It is therefore necessary to adopt a transparent methodology that ensures the benchmark’s reliability and accuracy.

(25) It may be necessary to change the methodology to ensure the continued accuracy of the benchmark, but any changes in the methodology have an impact on the users and stakeholders in the benchmark. It is therefore necessary to specify the procedures to be followed when changing the benchmark methodology, including the need for consultation, so that users and stakeholders can take the necessary actions in light of these changes or notify the administrator if they have concerns about these changes.

(26) The integrity and accuracy of benchmarks depends on the integrity and accuracy of the input data provided by contributors. It is essential that the obligations of the contributors in respect of such input data are clearly specified, can be relied on and are consistent with the benchmark administrator’s controls and methodology. ▌Therefore , where appropriate and possible, and in collaboration with its contributors, the benchmark administrator should produce a code of conduct to specify these requirements and the contributors' responsibilities concerning the provision of input data .

(27) Many benchmarks are determined by the application of a formula calculated using input data that is provided by regulated venues, approved publication arrangements or reporting mechanisms , energy exchanges or emission allowance auctions. In those cases, existing regulation and supervision ensure the integrity and transparency of the input data and provide for governance requirements and procedures for the notification of infringements . Therefore , provided the underlying input data is in its entirety sourced from venues subject to post-trade transparency requirements, including a third country market considered to be equivalent to a regulated market in the Union, these benchmarks should not be subject to certain obligations in this Regulation, in order to avoid dual regulation and because their supervision ensures the integrity of the input data used.

(28) Contributors may be subject to conflicts of interest and may exercise discretion in the determination of the input data. Therefore it is necessary that contributors , where possible and appropriate, be made subject to governance arrangements to ensure that these conflicts are managed and that the input data is accurate, conforms to the administrator’s requirements and can be validated.

(29) Different types of benchmark and different benchmark sectors have different characteristics, vulnerabilities and risks. The provisions of this Regulation should be further specified for particular benchmark sectors and types. Commodity benchmarks are widely used and have sector-specific characteristics and so it is necessary to specify how these provisions would apply to these benchmarks in this Regulation. In addition, some degree of flexibility should be foreseen in this Regulation in order to allow for a timely update of the differentiated requirements applying to different benchmark sectors in light of ongoing international developments, with particular regard to the work of the International Organisation of Securities Commissions (IOSCO) .

(29a) In order for a benchmark to be deemed critical under this Regulation it must be deemed systemic in nature or be used in a systemic manner and be vulnerable to manipulation, in order to ensure regulatory proportionality.

(30) The failure of certain critical benchmarks may have a significant impact on financial stability, market orderliness or investors and it is therefore necessary that additional requirements apply to ensure the integrity and robustness of those critical benchmarks. Those potentially destabilising effects of critical benchmarks can be felt in a single Member State or in more than one. The national competent authorities and ESMA will establish which benchmarks are to be classed as critical.

(30a) Given the strategic importance of critical benchmarks for the good functioning of the internal market, ESMA shall have the power to adopt decisions that are directly applicable to the administrator and where applicable, to contributors to the benchmark, where the national competent authority has not applied this Regulation or has breached Union law and following the procedure laid down in Article 17 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council (9) .

(31) Contributors ceasing to contribute may undermine the credibility of critical benchmarks , as the capability of those benchmarks to measure the underlying market or economic reality would be impaired . It is therefore necessary to include a power for the relevant competent authority to require mandatory contributions from supervised entities to critical benchmarks in order to preserve the credibility of the benchmark in question. Mandatory contribution of input data is not intended to impose an obligation on supervised entities to enter into, or commit to entering into, transactions .

(31a) Once a benchmark has been classed as critical, its administrator could exploit a monopoly position over the users of that benchmark. With that in mind, the college of competent authorities for that critical benchmark will need to oversee the sale price and the administrator’s costs in order to prevent market abuse.

(32) In order for users of benchmarks to make appropriate choices of, and understand the risks of benchmarks, they need to know what the benchmark measures and their vulnerabilities. Therefore the benchmark administrator should publish a statement specifying these elements▌. The administrator should, upon request, make its input data available to the relevant competent authority in the context of an investigation. ▌

(34) This Regulation should take into account the Principles for financial benchmarks issued by the International Organization of Securities Commissions (IOSCO) (‘IOSCO Financial Benchmark Principles’) on 17 July 2013 as well as the Principles for Oil Price Reporting Agencies issued by IOSCO on 5 October 2012 (‘IOSCO PRA Principles’) which serve as a global standard for regulatory requirements for benchmarks .

(34a) Physical commodities markets present unique characteristics which must be taken account of in order to avoid undermining the integrity of commodity benchmarks and negatively impacting commodity market transparency, European security of supply, competitiveness and the interests of consumers. Accordingly, certain provisions of this Regulation are not appropriate to apply to commodity benchmarks. Principles developed for commodity benchmarks by IOSCO in collaboration with the International Energy Agency and the International Energy Forum, among others, are specifically designed to apply to all commodity benchmarks and therefore this Regulation provides that certain requirements will not apply to commodity benchmarks.

(34b) This Regulation also introduces a recognition regime allowing administrators of benchmarks located in a third country to provide their benchmarks in the Union provided they fully comply with the requirements set out in this Regulation or with the provisions in the relevant IOSCO principles.

(34c) This Regulation introduces an endorsement regime allowing administrators located in the Union and authorised or registered in accordance with its provisions to endorse benchmarks provided in third countries, under certain conditions. Such an endorsement regime should be introduced for third country administrators that are affiliated or work closely with administrators located in the Union. An administrator that has endorsed benchmarks provided in a third country should be responsible for such endorsed benchmarks and ensure that they fulfil the relevant conditions referred to in this Regulation or that they fully fulfil the requirements of the relevant IOSCO principles.

(35) The administrator of a critical benchmark should be authorised and supervised by the competent authority of the Member State where that administrator is located. An administrator that only provides benchmarks determined by the application of a formula using input data contributed entirely and directly by regulated venues, approved publication arrangements or reporting mechanisms, energy exchanges or emission allowance auctions and/or an administrator that provides only non-critical benchmarks, should be registered with, and supervised by, the competent authority. The registration of an administrator is not intended to affect supervision by the relevant competent authorities. ESMA should maintain a register of administrators at Union level.

(36) In some circumstances a person may provide an index but be unaware that this index is being used as a reference for a financial instrument. This is particularly the case where the users and benchmark administrator are located in different Member States. It is therefore necessary to increase the level of transparency with regard to which benchmark is being used. This can be achieved by improving the content of the prospectuses or key information documents required by the Union law and the content of the notifications and list of financial instruments required by Regulation (EU) No 596/2014 of the European Parliament and of the Council (10).

(37) A set of effective tools and powers and resources for the competent authorities of Member States and for ESMA guarantees supervisory effectiveness. This Regulation therefore should in particular provide for a minimum set of supervisory and investigative powers ▌which should be entrusted to competent authorities of Member States in accordance with national law and to ESMA . When exercising their powers under this Regulation competent authorities and ESMA should act objectively and impartially and remain autonomous in their decision making.

(38) For the purpose of detecting infringements of this Regulation, it is necessary for competent authorities and ESMA to be able to access, in accordance with national law, the premises of natural and legal persons in order to seize documents. The access to such premises is necessary when there is reasonable suspicion that documents and other data related to the subject matter of an inspection or investigation exist and may be relevant to prove an infringement of this Regulation. Additionally the access to such premises is necessary where: the person to whom a demand for information has already been made fails to comply with it; or where there are reasonable grounds for believing that if a demand were to be made, it would not be complied with, or that the documents or information to which the information requirement relates, would be removed, tampered with or destroyed. If prior authorisation is needed from the judicial authority of the Member State concerned, in accordance with national law, such power for access into premises shall be used after having obtained that prior judicial authorisation.

(39) Existing recordings of telephone conversations and data traffic records from supervised entities may constitute crucial, and sometimes the only evidence to detect and prove the existence of infringements of this Regulation, notably the compliance with governance and control requirements. Such records and recordings can help to verify the identity of the person responsible for the submission, those responsible for its approval and whether organisational separation of employees is maintained. Therefore, competent authorities should be able to require existing recordings of telephone conversations, electronic communications and data traffic records held by supervised entities, in those cases where a reasonable suspicion exists that such recordings or records related to the subject-matter of the inspection or investigation may be relevant to prove an infringement of this Regulation.

(40) Some of the provisions of this Regulation apply to natural or legal persons in third countries who may use benchmarks or be contributors to benchmarks or may be otherwise involved in the benchmark process. Competent authorities should therefore enter into arrangements with supervisory authorities in third countries. ESMA should coordinate the development of such cooperation arrangements and the exchange between competent authorities of information received from third countries.

(41) This Regulation respects the fundamental rights and observes the principles recognised in the Treaty on the Functioning of the European Union (TFEU) and in the Charter of Fundamental Rights of the European Union (‘the Charter’) , in particular the right to respect for private and family life , the protection of personal data, the right to freedom of expression and information, the freedom to conduct a business, the right to property, the right to consumer protection, the right to an effective remedy, the right of defence. Accordingly , this Regulation should be interpreted and applied in accordance with those rights and principles. In particular, where this Regulation refers to rules governing the freedom of expression in other media and the rules or codes governing journalist professions, consideration should be given to those freedoms as they are guaranteed in the Union and in the Member States and as recognised under Article 11 of the Charter and under other relevant provisions. This Regulation should not apply to the press, other media and journalists where they merely publish or refer to a benchmark as part of their journalistic activities with no control over the provision of that benchmark.

(42) The rights of defence of the persons concerned should be fully respected. In particular, persons subject to proceedings shall be provided with access to the findings upon which the competent authorities has based the decision and shall be given the right to be heard.

(43) Transparency regarding benchmarks is necessary for reasons of financial market stability and investor protection. Any exchange or transmission of information by competent authorities should take place in accordance with the rules on the transfer of personal data as laid down in Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (11). Any exchange or transmission of information by ESMA should take place in accordance with the rules on the transfer of personal data as laid down in Regulation (EC) No 45/2001 of the European Parliament and of the Council of 18 December 2000 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data (12).

(44) Taking into consideration the principles set out in the Commission’s communication on reinforcing sanctioning regimes in the financial services sector and legal acts of the Union adopted as a follow-up to that Communication, Member States should lay down rules on penalties and administrative measures applicable to infringements of the provisions of this Regulation and should ensure that they are implemented. Those penalties and administrative measures should be effective, proportionate and dissuasive.

(45) Therefore, a set of administrative measures, sanctions and fines should be provided for to ensure a common approach in Member States and to enhance their deterrent effect. Sanctions applied in specific cases should be determined taking into account where appropriate factors such as the presence or absence of intent, the repayment of any identified financial benefit, the gravity and duration of the infringement , any aggravating or mitigating factors, the need for fines to have a deterrent effect and, where appropriate, include a reduction in return for cooperation with the competent authority.▌

(46) In order to ensure that decisions made by competent authorities have a deterrent effect on the public at large, they should normally be published. The publication of decisions is also an important tool for competent authorities to inform market participants of what behaviour is considered constitute a violation of this Regulation and to promote wider good behaviour amongst market participants. If such publication risks causing disproportionate damage to the persons involved, jeopardises the stability of financial markets or an on-going investigation the competent authority should publish the sanctions and measures on an anonymous basis or delay the publication. Competent authorities should have the option not to publish sanctions where anonymous or delayed publication is considered insufficient to ensure that the stability of financial markets are not be jeopardised. Competent authorities are also not required to publish measures which are deemed to be of a minor nature where publication would be disproportionate.

(47) Critical benchmarks may involve contributors, administrators and users in more than one Member State. Thus, the cessation of the provision of such a benchmark or any events that may significantly undermine its integrity may have an impact in more than one Member State meaning that the supervision of such a benchmark by the competent authority of the Member State in which it is located alone will not be efficient and effective in terms of addressing the risks that the critical benchmark poses. To ensure the effective exchange of supervisory information among competent authorities, coordination of their activities and supervisory measures, colleges of competent authorities, with ESMA in the lead, should be formed. The activities of the colleges should contribute to the harmonised application of rules under this Regulation and to the convergence of supervisory practices. ESMA's legally binding mediation is a key element of the achievement of coordination, supervisory consistency and convergence of supervisory practices. Benchmarks may reference financial instruments and financial contracts that have a long duration. In certain cases such benchmarks may no longer be permitted to be provided once this Regulation comes into effect because they have characteristics that cannot be adjusted to conform to the requirements of this Regulation. However, prohibiting the continued provision of such a benchmark may result in the termination or frustration of the financial instruments or financial contracts and so harm investors. It is therefore necessary to make provision to allow for the continued provision of such benchmarks for a transitional period.

(47a) In cases where this Regulation captures or potentially captures supervised entities and markets covered by Regulation (EU) No 1227/2011 of the European Parliament and the Council (13) (REMIT), the Agency for the Cooperation of Energy Regulators (ACER) should be fully consulted by ESMA in order to draw upon ACER's expertise in energy markets and to mitigate any dual regulation.

(47b) Where an existing benchmark does not comply with the requirements of this Regulation but changing the benchmark to bring it into compliance with this Regulation would result in a force majeure event or breach the terms of a financial contract or financial instrument, the relevant competent authority may permit the continued use of the benchmark until such a time as it is possible for the benchmark to cease being used or to be substituted by another benchmark to avoid adverse effects on consumers caused by a disorderly and abrupt cessation of the benchmark.

(48) In order to ensure uniform conditions for the implementation of this Regulation and further specify technical elements of the proposal, the power to adopt acts in accordance with Article 290 TFEU should be delegated to the Commission▌. When proposing those acts, the prevailing international standards for administration, contribution and the use of benchmarks should be taken into account, especially the results of the work of IOSCO. Proportionality, especially in the case of non-critical benchmarks and commodity benchmarks, must be respected.

(49) The Commission should adopt draft regulatory technical standards developed by ESMA concerning governance and control requirements and establishing the minimum content of cooperation arrangements with the competent authorities of third countries, amongst others, by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

(50) In order to ensure uniform conditions for the implementation of this Regulation, in regard to certain of its aspects implementing powers should be granted to the Commission. Those aspects concern the ascertainment of the equivalence of the legal framework to which ▌ providers of benchmarks of third countries are subject, as well of the fact that a benchmark is critical in nature. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council of 16 February 2011 (14) laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers.

(51) The Commission should also be empowered to adopt implementing technical standards developed by ESMA establishing procedures and forms for exchange of information between competent authorities and ESMA, by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1095/2010. Since the objectives of this Regulation, namely to lay down a consistent and effective regime to address the vulnerabilities that benchmarks pose cannot be sufficiently achieved by the Member States, given that the overall impact of the problems relating to benchmarks can be fully perceived only in a Union context, and can therefore be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives,

HAVE ADOPTED THIS REGULATION:

TITLE 1

SUBJECT MATTER, SCOPE AND DEFINITIONS

Article 1

Subject matter

This Regulation introduces a common framework to ensure the accuracy and integrity of indices used as benchmarks in financial instruments and financial contracts in the Union. The Regulation thereby contributes to the proper functioning of the internal market while achieving a high level of consumer and investor protection.

Article 2

Scope

1. This Regulation shall apply to the provision of benchmarks, the contribution of input data to a benchmark and ▌the use of a benchmark within the Union.

2. This Regulation shall not apply to the provision of benchmarks by :

(a) ▌central banks , where they are exercising powers or carrying out the tasks and duties conferred on them by the Treaties and by the Statute of the European System of Central Banks (ESCB) and of the ECB, or for which their independence is inherent in the constitutional structures of the Member State or third country concerned;

(aa) public authorities, where they provide, or have control over the provision of, benchmarks for public policy purposes, including measures of employment, economic activity, and inflation;

(ab) central counterparties;

(ac) administrators where they provide single prices or single value reference prices;

(ad) the press, other media and journalists where they merely publish or refer to a benchmark as part of their journalistic activities with no control over the provision of that benchmark;

(ae) credit unions within the meaning of Directive 2013/36/EU of the European Parliament and the Council (15).

▌

2a. Article 5(1), (2a), (3b), (3c), and (3d), Articles 5a and 5b, Article 5d(b) to (g), Article 7(1)(aa), (b), (ba), (bb), (bc) and (c), Article 7(2a), (3a) and (3b), Article 7a, Article 8(1) and (2), Article 9(1) and (2), Article 11 and Article 17(1) shall not apply to administrators in respect of their non-critical benchmarks.

▌

Article 3

Definitions

1. For the purposes of this Regulation, the following definitions ▌apply:

(1) ‘index’ means any figure: (a) that is published or made available to the public; (b) that is regularly determined, entirely or partially, by the application of a formula or any other method of calculation, or by an assessment; and (c) where this determination is made on the basis of the value of one or more underlying assets, or prices, including estimated prices, actual or estimated interest rates, or other values or surveys ;

(1a) ‘ index provider ’ means a natural or legal person that has control over the provision of an index;

(2) ‘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▌;

(2a) ‘family of benchmarks’means a group of benchmarks provided by the same administrator determined from input data of a similar nature which provides specific measures of the same or similar market or economic reality;

(3) ‘provision of a benchmark’ means: (a) administering the arrangements for determining a benchmark; ▌ (b) collecting, analysing or processing input data for the purpose of determining a benchmark; and (c) determining a benchmark through the application of a formula or other method of calculation or by an assessment of input data provided for that purpose;

(4) ‘administrator’ means a natural or legal person that has control over the provision of a benchmark;

(5) ‘ use of a benchmark’ means: (a) issuance of a financial instrument which references an index or a combination of indices; (b) determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices; (c) being party to a financial contract which references an index or a combination of indices; (d) determination of the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio or of computing the performance fees;

(6) ‘contribution of input data’ means providing any input data not publicly available to an administrator, or to another person for the purposes of passing to an administrator, that is required in connection with the determination of a benchmark, and is provided for that purpose;

(7) ‘contributor’ means a natural or legal person contributing input data that is not regulated data ;

(8) ‘supervised contributor’ means a supervised entity that contributes input data to an administrator located in the Union;

(9) ‘submitter’ means a natural person employed by the contributor for the purpose of contributing input data;

(9a) ‘assessor’ means an employee of an administrator of a commodity benchmark, or any other natural person or third party, whose services are placed at the administrator's disposal or under its control and who is responsible for applying a methodology or judgement to input data and other information to reach a conclusive assessment about the price of a certain commodity;

(10) ‘input data’ means the data in respect of the value of one or more underlying assets, or prices, including estimated prices, or other values, used by the administrator to determine the benchmark;

(11) ‘regulated data’ means: (i) input data that is contributed entirely from: (a) a trading venue as defined in point ( 24 ) of ▌Article 4(1) of Directive 2014/65/EU but only with reference to data concerning financial instruments; (b) an approved publication arrangement as defined in point ( 52 ) of Article 4(1) of Directive 2014/65/EU or a consolidated tape provider as defined in point ( 53 ) of ▌Article 4(1) of Directive 2014/65/EU, in accordance with mandatory post-trade transparency requirements , but only with reference to data of transactions concerning financial instruments that are traded on a trading venue; (c) an approved reporting mechanism as defined in point (54) of Article 4(1) of Directive 2014/65/EU, but only with reference to data of transactions concerning financial instruments that are traded on a trading venue and that must be disclosed in accordance with mandatory post-trade transparency requirements; (d) an electricity exchange as referred to in point (j) of paragraph 1 of Article 37 of Directive 2009/72/EC of the European Parliament and of the Council (16); (e) a natural gas exchange as referred to in point (j) of paragraph 1 of Article 41 of Directive 2009/73/EC of the European Parliament and of the Council (17); (f) an auction platform referred to in Article 26 or ▌ 30 of Commission Regulation (EU) No 1031/2010 (18); (g) data provided under Article 8(1) of Regulation (EU) No 1227/2011 and elaborated in Commission Implementing Regulation (EU) No 1348/2014 (19) ; or (h) a third country trading venue, platform, exchange, publication arrangement or reporting mechanism equivalent to those specified in points (a) to (g) or any other entity such as a transactional data aggregator or a transactional data collector whose contribution of input data is already subject to appropriate supervision; and (ii) net asset values of the units of undertakings for collective investment in transferable securities (UCITS) as defined in Article 1(2) of Directive 2009/65/EC (20).

(12) ‘transaction data’ means observable prices, rates, indices or values representing transactions between unaffiliated counterparties in an active market subject to competitive supply and demand forces;

(13) ‘financial instrument’ means any of the instruments listed in Section C of Annex I to Directive 2014/65/EU for which a request for admission to trading on a trading venue , as defined in point (24) of Article 4(1) of Directive 2014/65/EU, has been made or which are traded on a trading venue as defined in point (24) of Article 4(1) of Directive 2014/65/EU ;

(14) ‘supervised entity’ means the following: (a) credit institutions as defined in point (1) of Article 3 of Directive 2013/36/EU; (b) investment firms as defined in point (1) of paragraph 1 of Article 4(1) of Directive 2014/65/EU ; (c) insurance undertakings as defined in point (1) of Article 13 Directive 2009/138/EC of the European Parliament and of the Council (21); (d) reinsurance undertakings as defined in point ( 4 ) of Article 13 Directive 2009/138/EC; (e) UCITS as defined in Article 1(2) of Directive 2009/65/EC (22); (f) alternative investment fund managers (AIFMs) as defined in point (b) of Article 4(1) of Directive 2011/61/EU of the European Parliament and of the Council (23); (g) central counterparties or CCPs , as defined in point (1) of Article 2 of Regulation (EU) No 648/2012 of the European Parliament and of the Council (24); (h) trade repositories as defined in point (2) of Article 2 of Regulation (EU) No 648/2012; (i) administrators;

(15) ‘financial contract’ means: (a) any credit agreement as defined in point (c) of Article 3 of Directive 2008/48/EC of the European Parliament and of the Council (25); (b) any credit agreement as defined in point 3 of Article 4 of Directive 2014/17/EU of the European Parliament and of the Council (26);

(16) ‘investment fund’ means AIFs as defined in point (a) of paragraph 1 of Article 4 of Directive 2011/61/EU, or UCITS falling within the scope of Directive 2009/65/EC;

(17) ‘management body“means the governing body, comprising the supervisory and the management function, which has ultimate decision-making authority and is empowered to set the entity’s strategy, objectives and overall direction;

(18) “consumer” means a natural person who, in financial contracts covered by this Regulation is acting for purposes which are outside his or her trade, business or profession;

(19) “interbank interest rate benchmark” means a benchmark where the underlying asset for the purposes of point (1)(c) of this Article is the rate at which banks may lend to, or borrow from other banks;

(19a) “foreign exchange rate benchmark” means a benchmark the value of which is determined in relation to the price, expressed in one currency, of one or a basket of currencies;

(20) “commodity benchmark” means a benchmark where the underlying asset for the purposes of point (1)(c) of this Article is a commodity within the meaning of point (2) of Article 2 of Commission Regulation (EC) No 1287/2006 (27) , excluding emission allowances as referred to in point (11) of Section C of Annex I of Directive 2014/65/EU ;

(20a) “basis risk” means the risk related to the accuracy of the description by a benchmark of the underlying market or economic reality that the benchmark intends to measure;

(21) “critical benchmark” means: (a) a benchmark that is not based on regulated data, the reference value of which exceeds EUR 500 billion euro as defined in Article 13(1) ; or (b) a benchmark, the cessation of which would have a significant adverse impact on financial stability, on the orderly functioning of the markets and on the real economy in one or more Member States; A critical benchmark is “national” in nature where the adverse effects of it no longer being provided or it being provided using an unrepresentative set of contributors or data are restricted to one Member State. In such a case, the procedure laid down in Article 13(2a) to (2d) applies. A critical benchmark is “European” in nature where the adverse effects of it no longer being provided or it being provided using an unrepresentative set of contributors or data are not restricted to one Member State. In such a case, the procedure laid down in Article 13(2e), (2f) and (2 g) applies.

(21a) “non-critical benchmark” means a benchmark which does not meet the criteria for a critical benchmark provided for in Article 13;

(22) “located” means in relation to a legal person, the Member State or third country where that person’s registered office or other official address is situated and in relation to a natural person, the Member State or third country where that person is resident for tax purposes;

(22a) “public authority” means: (a) any government or public administration; (b) any entity or person either performing public administrative functions under national law or having public responsibilities or functions or providing public services, including measures of inflation, labour and economic activities, under the control of any government or public authority.

2. The Commission shall be empowered to adopt delegated acts in accordance with Article 37 in order to specify further technical elements of the definitions laid down in paragraph 1, in particular specifying what constitutes making available to the public for the purposes of the definition of an index. In those delegated acts, the Commission shall ensure that “ published ” or “ 'made available” to the public ” is understood as “ made available to the wider public of users or potential users ”.

Where applicable, the Commission shall take into account market or technological developments and the international convergence of supervisory practice in relation to benchmarks.

2a. The Commission shall adopt implementing acts in order to establish a list of public authorities in the Union as referred to in point (22a) of paragraph 1 of this Article and to review that list. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 38(2).

Article 4

Exclusion of index providers unaware of the use of benchmarks provided by them ▌

▌This Regulation shall not apply to an index provider in respect of an index provided by him or her where that index provider is unaware and could not reasonably have been aware that that index is used for the purposes referred to in point (2) of Article 3(1).

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TITLE II

BENCHMARK INTEGRITY AND RELIABILITY

Chapter 1

Governance and Control of Administrators

Article 5

Governance and conflict of interest requirements

1. The ▌administrator shall have robust governance arrangements which include a clear organisational structure with well-defined, transparent and consistent roles and responsibilities for all persons involved in the provision of a benchmark.

The administrator shall take all necessary steps to identify and to prevent or manage conflicts of interests between itself, including its managers, employees or any other natural person or third party whose services are placed at its disposal or under its control, and the contributors or users and to ensure that, where any discretion or judgement in the benchmark process is required, it is exercised independently and fairly.

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2a. The provision of a benchmark shall be operationally separated from any part of the administrator's business that may create an actual or potential conflict of interest. Where conflicts of interests may arise within the administrator due to its ownership structure, controlling interests or other activities conducted by any entity owning or controlling the administrator or by an entity that is owned or controlled by the administrator or any of its affiliates, the administrator shall establish an independent oversight function which shall include a balanced representation of a range of stakeholders, where the stakeholders are known, as well as subscribers and contributors. If such conflicts cannot be adequately managed, the administrator shall either cease any activities or relationships that create those conflicts or shall cease producing the benchmark.

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3a. An administrator shall publish or disclose all existing or potential conflicts of interest to users of the benchmark and the relevant competent authority and, where relevant, to contributors, including conflicts of interest arising from the ownership or control of the administrator.

3b. An administrator shall establish and operate adequate policies and procedures, as well as effective organisational arrangements, for the identification, disclosure, management, mitigation and avoidance of conflicts of interest in order to protect the integrity and independence of benchmark determinations. Such policies and procedures shall be regularly reviewed and updated. The policies and procedures shall take into account and address conflicts of interest, the degree of discretion exercised in the benchmark process and the risks that the benchmark poses, and shall:

(a) ensure the confidentiality of information contributed to or produced by the administrator, subject to the disclosure and transparency obligations under this Regulation; and

(b) specifically mitigate conflicts due to the administrator’s ownership or control, or due to other interests in its group or as a result of other persons that may exercise influence or control over the administrator in relation to setting the benchmark.

3c. The administrator shall ensure that employees and any other natural persons whose services are placed at its disposal or under its control and who are directly involved in the provision of a benchmark:

(a) have the necessary skills, knowledge and experience for the duties assigned to them and are subject to effective management and supervision;

(b) are not subject to undue influence or conflicts of interest and that the compensation and performance evaluation of those persons do not create conflicts of interest or otherwise impinge on the integrity of the benchmark process;

(c) do not have any interests or business connections that compromise the administrator’s functions;

(d) are prohibited from contributing to a benchmark determination by way of engaging in bids, offers and trades on a personal basis or on behalf of market participants; and

(e) are subject to effective procedures to control the exchange of information with other employees, and are not involved in activities that may create a risk of conflict of interest.

3d. The administrator shall establish specific control procedures to ensure the integrity and reliability of the employee or person determining the benchmark, which could include an internal sign-off by management before the dissemination of a benchmark or an appropriate substitution, for example in the case of a benchmark that is updated intra-day or on a real-time basis.

3e. Any non-material change to the benchmark in respect of provisions covered in this Article shall not be considered to be a breach of any financial contract or financial instrument which references that benchmark. For a critical benchmark, the relevant competent authority shall have the power to deem a change to be material.

Article 5a

Oversight function requirements

1. The administrator shall establish and maintain a permanent and effective oversight function to ensure oversight of all aspects of the provision of its benchmarks.

2. An administrator shall develop and maintain robust procedures regarding its oversight function, which shall be made available to the relevant competent authorities.

The main features of the procedures shall include:

(a) the terms of reference of the oversight function;

(b) criteria to select members of the oversight function;

(c) the summary details of membership of any board or committee charged with the oversight function, along with any declarations of conflicts of interest and processes for election, nomination or removal and replacement of committee member.

3. The oversight function shall operate independently and shall include the following responsibilities, which shall be adjusted for the complexity, use and vulnerability of the benchmark:

(a) at least annually reviewing the benchmark's definition and methodology;

(b) overseeing any changes to the benchmark methodology and authorising the administrator to consult on such changes;

(c) overseeing the administrator's control framework, the management and operation of the benchmark, and, where a benchmark makes use of contributors, the code of conduct referred to in Article 9(1);

(d) reviewing and approving procedures for cessation of the benchmark, including any consultation about a cessation;

(e) overseeing any third party involved in the benchmark provision, including calculation or dissemination agents;

(f) assessing internal and external audits or reviews, and monitoring the implementation of remedial actions highlighted in the results of those audits;

(g) where the benchmark makes use of contributors, monitoring the input data and contributors and the actions of the administrator in challenging or validating contributions of input data;

(h) where the benchmark makes use of contributors, taking effective measures in respect of any breaches of the code of conduct; and

(i) where the benchmark makes use of contributors, reporting to the relevant competent authorities any misconduct by contributors or administrators of which the oversight function becomes aware, and any potentially anomalous or suspicious input data.

4. The oversight function shall be carried out by a separate committee or by another appropriate governance arrangement.

ESMA shall develop draft regulatory technical standards to determine the characteristics that the oversight function shall have in terms of composition as well as of positioning within the organisational structure of the administrator, so as to ensure the integrity of the function and the absence of conflicts of interest.

ESMA shall distinguish for different types of benchmarks and sectors as set out in this Regulation and shall take into consideration the differences in the ownership and control structure of administrators, the nature, scale and complexity of the provision of the benchmark, and the risk and impact of the benchmark, also in light of international convergence of supervisory practice in relation to governance requirements of benchmarks.

ESMA shall submit those draft regulatory technical standards to the Commission by [XXX].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.

5. The oversight function may exercise oversight of more than one benchmark provided by an administrator provided that it otherwise complies with the other requirements of Titles I and IV.

6. Any non-material change to the benchmark in respect of provisions covered in this Article shall not be considered to be a breach of any financial contract or financial instrument which references that benchmark. For a critical benchmark, the relevant competent authority shall have the power to deem a change to be material.

Article 5b

Control framework requirements

1. The administrator shall have a control framework that ensures that the benchmark is provided and published or made available in accordance with this Regulation.

2. The control framework shall be proportionate to the level of conflicts of interest identified, the extent of discretion in the benchmark provision and the nature of benchmark input data and shall include:

(a) the management of operational risk;

(b) the contingency and recovery procedures that are in place in the event of a disruption to the benchmark provision.

3. Where input data is not transaction data, the administrator shall:

(a) establish measures to ensure, to the extent possible, that contributors comply with the code of conduct referred to in Article 9(1) and the applicable standards for the input data;

(b) establish measures to monitor input data, including monitoring the input data before publication of the benchmark and validating the input data after publication in order to identify errors and anomalies.

4. The control framework shall be documented, reviewed and updated as appropriate and made available to the relevant competent authority, and upon request, to the users.

5. Any non-material change to the benchmark in respect of provisions covered in this Article shall not be considered to be a breach of any financial contract or financial instrument which references that benchmark. For a critical benchmark, the relevant competent authority shall have the power to deem a change to be material.

Article 5c

Accountability Framework Requirements

1. The administrator shall have an accountability framework covering record keeping, auditing and review, and complaints process that provides evidence of compliance with the requirements of this Regulation.

2. The administrator shall appoint an independent internal or external function, with the necessary capability to review and report on the administrator's compliance with the benchmark methodology and this Regulation.

3. For non-critical benchmarks, the administrator shall publish and maintain a compliance statement in which the administrator shall report on its compliance with this Regulation. The compliance statement shall at least cover the requirements laid down in Articles 5(1), (2a), (3b), (3c) and (3d), Articles 5a and 5b, Article 5d(b) to (g), Article 7(1)(aa), (b), (ba), (bb), (bc) and (c), Article 7(2a), (3a) and (3b), Article 7a, Article 8(1) and (2), Article 9(1) and 9(2), Article 11, and Article 17(1).

Where the administrator does not comply with the requirements laid down in Articles 5(1), (2a), (3b), (3c) and (3d), Articles 5a and 5b, Article 5d(b) to (g), Article 7(1)(aa), (b), (ba), (bb), (bc) and (c), Article 7(2a), (3a) and (3b), Article 7a, Article 8(1) and (2), Article 9(1) and (2), Article 11 and Article 17(1), the compliance statement shall clearly state why it is appropriate for that administrator not to comply with those provisions.

4. The administrator of a non-critical benchmark shall appoint an independent external auditor to review, and report on, the accuracy of the administrator’s compliance statement. Such an audit shall take place at least every two years and whenever material changes to the benchmark occur.

5. The administrator shall provide the audits under paragraph 4 to the relevant competent authority. The administrator shall provide or publish details of the audits under paragraph 4 to any user of the benchmark upon request. Upon the request of the relevant competent authority, or any user of the benchmark, the administrator shall provide or publish details of the reviews referred to in paragraph 4.

6. The relevant competent authority may request additional information from the administrator in respect of their non-critical benchmarks in accordance with Article 30 and/or issue a recommendation to the administrator regarding the administrator’s compliance with the provisions covered by the compliance statement until the full satisfaction of the competent authority. The competent authority may publish the recommendation on its website.

Article 5d

Record keeping requirements

1. The administrator shall keep records of:

(a) all input data;

(b) any exercise of judgement or discretion by the administrator and, where applicable, by assessors, in the benchmark determination;

(c) records of the disregard of any input data, in particular where it conformed to the requirements of the benchmark methodology, and the rationale for such disregard;

(d) other changes in or deviations from standard procedures and methodologies, including those made during periods of market stress or disruption;

(e) the identities of the submitters and of the natural persons employed by the administrators for determining the benchmarks;

(f) all documents relating to any complaint; and

(g) records of relevant communications between any person employed by the administrator and the contributors or submitters in respect of the benchmark.

2. Where the benchmark is based on contributions from contributors, the contributor shall also keep records of any relevant communications, including with other contributors.

3. The administrator shall keep the records set out in paragraph 1 for at least five years in such a form that it is possible to replicate and fully understand the benchmark calculations and enable an audit or evaluation of the input data, calculations, judgements and discretion. Records of telephone conversation or electronic communications shall be provided to the persons involved in the conversation or communication upon request and shall be kept for a period of three years.

Article 5e

Complaint handling

The administrator shall have in place and publish written procedures for receiving, investigating and retaining records concerning complaints made about an administrator's calculation process. Such a complaint mechanism shall ensure that:

(a) an administrator shall have in place a mechanism detailed in a written complaints handling policy, through which its subscribers may submit complaints on whether a specific benchmark calculation is representative of market value, proposed benchmark calculation changes, applications of methodology in relation to a specific benchmark calculation, and other editorial decisions in relation to the benchmark calculation processes;

(b) there is a process and target timetable for the handling of complaints;

(c) formal complaints made against an administrator and its personnel are investigated by that administrator in a timely and fair manner;

(d) the inquiry is conducted independently of any personnel who may be involved in the subject matter of the complaint;

(e) an administrator shall aim to complete its investigation promptly.

Article 5f

Regulatory technical standards on governance and control requirements

ESMA shall develop draft regulatory technical standards to specify further and calibrate the governance and control requirements under Articles 5(2a), 5(3a-3d), 5a(2), 5a(3), 5b(2), 5b(3), 5c(2), 5c(1) to (3). ESMA shall take account of the following:

(a) developments in benchmarks and financial markets in light of international convergence of supervisory practice in relation to governance requirements of benchmarks;

(b) specific features of different types of benchmarks and administrators including sectoral features and the types of input data used;

(c) distinction between critical and non-critical benchmarks;

(d) whether requirements are already partially or fully covered by other relevant regulatory requirements, particularly for benchmarks based on regulated data, and particularly but not limited to requirements under Directive 2014/65/EU or Regulation (EU) No 600/2014of the European Parliament and of the Council (28) , so as to ensure that no duplication of requirements or other unnecessary burdens for administrators result.

ESMA shall submit those draft regulatory technical standards to the Commission by […].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

Article 6

Outsourcing

1. Administrators shall not outsource functions in the provision of a benchmark in such a way as to impair materially the administrator’s control over the provision of the benchmark or the ability of the relevant competent authority to supervise the benchmark.

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3. Where an administrator outsources functions or any relevant services and activities in the provision of a benchmark to any service provider, it shall remain fully responsible for discharging all of its obligations under this Regulation.

3a. Where outsourcing takes place, the administrator shall ensure that the following conditions are satisfied:

(a) the service provider shall have the ability, capacity, and any authorisation required by law, to perform the outsourced functions, services or activities reliably and professionally;

(b) the administrator shall make available to the relevant competent authorities the identity and the tasks of the service provider who participates in the benchmark determination process;

(c) the administrator shall take appropriate action if it appears that the service provider may not be carrying out the outsourced functions effectively and in compliance with applicable law and regulatory requirements;

(d) the administrator shall retain the necessary expertise to supervise the outsourced functions effectively and to manage the risks associated with the outsourcing;

(e) the service provider shall disclose to the administrator any development that may have a material impact on its ability to carry out the outsourced functions effectively and in compliance with applicable law and regulatory requirements;

(f) the service provider shall cooperate with the relevant competent authority in connection with the outsourced activities, and the administrator and the relevant competent authority shall have effective access to data related to the outsourced activities, as well as to the business premises of the service provider, and the relevant competent authority shall be able to exercise those rights of access;

(g) the administrator shall be able to terminate the arrangements where necessary.

(h) the administrator shall take reasonable steps, including contingency plans, to avoid undue operational risk related to the participation of the service provider in the benchmark determination process.

Chapter 2

Input data, methodology and reporting of infringements

Article 7

Input data ▌

1. The provision of a benchmark shall be governed by the following requirements in respect of its input data ▌:

(a) The input data shall be transaction data or, where more appropriate, non-transaction based data, including committed quotes and verifiable estimates, provided that it accurately and reliably represents the market or economic reality that the benchmark is intended to measure▐.

(aa) The input data referred to in point (a) shall be verifiable.

(b) The administrator shall obtain the input data from a reliable and representative panel or sample of contributors so as to ensure that the resulting benchmark is reliable and representative of the market or economic reality that the benchmark is intended to measure▐.

(ba) The administrator shall only use input data from contributors which comply with the code of conduct referred to in Article 9.

(bb) The administrator shall maintain a list of persons who may contribute input data to the administrator including procedures to evaluate the identity of a contributor and any submitters.

(bc) The administrator shall ensure contributors provide all relevant input data; and

(c) Where the input data of a benchmark is not transaction data and a contributor is a party to more than 50 % of the value of transactions in the market ▐ that the benchmark intends to measure, the administrator shall verify where possible, that the input data represents a market subject to competitive supply and demand forces. Where the administrator finds that the input data does not represent a market subject to competitive supply and demand forces, it shall either change the input data, the contributors or the methodology to ensure that the input data represents a market subject to competitive supply and demand forces, or cease to provide that benchmark ▌.

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2a. The administrator shall ensure that the controls in respect of the input data include:

(a) criteria that define who may contribute input data to the administrator and a process for selecting the contributors;

(b) a process for evaluating the contributor's input data and preventing the contributor from providing further input data or applying other sanctions for non-compliance against the contributor, where appropriate; and

(c) a process for validating the input data including against other indicators or data, to ensure its integrity and accuracy. Where a benchmark meets the criteria laid down in Article 14a, this requirement shall only apply where compliance is possible within reason.

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3a. Where the input data of a benchmark is contributed from a front office function, meaning any department, division, group, or personnel of contributors or any of its affiliates that performs any pricing, trading, sales, marketing, advertising, solicitation, structuring, or brokerage activities, the administrator shall:

(a) obtain data from other sources that corroborates that input data;

(b) ensure that contributors have adequate internal oversight and verification procedures that allow for: (i) validation of input data contributed, including procedures for multiple reviews by senior staff to check inputs and internal sign off procedures by management for submitting inputs; (ii) the physical separation of employees in the front office function and reporting lines; (iii) full consideration of conflict management measures to identify, disclose, manage, mitigate and avoid existing or potential incentives to manipulate or otherwise influence data inputs, including through remuneration policies and conflicts of interest between the contribution of input data activities and any other business of the contributor, its affiliates, or their respective clients or customers.

The provisions laid down in points (a) and (b) of the first subparagraph shall apply to benchmarks that meet the criteria laid down in Article 14a only where compliance with these provisions is possible within reason.

3b. Any non-material change to the benchmark in respect of provisions covered in this Article shall not be considered to be a breach of any financial contract or financial instrument which references that benchmark. For a critical benchmark, the relevant competent authority shall have the power to deem a change to be material.

3c. ESMA shall develop draft regulatory technical standards to specify further the internal oversight and verification procedures of a contributor that the administrator shall seek, in compliance with paragraph 2a and 3a, in order to ensure the integrity and accuracy of input data.

ESMA shall take into account the principle of proportionality with respect to non-critical and commodity benchmarks; the specificity of different types of benchmarks in particular those benchmarks based on contributions from entities that meet the criteria laid down in Article 14a; the nature of the input data, whether requirements are already partially or fully covered by other relevant regulatory requirements, particularly but not limited to requirements under Directive 2014/65/EU or Regulation (EU) No 600/2014, so as to ensure no duplication of requirements or other unnecessary burdens for administrators shall result, as well as the international convergence of supervisory practice in relation to benchmarks.

ESMA shall submit those draft regulatory technical standards to the Commission by [XXX].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.

Article 7a

Methodology

1. The administrator shall use a methodology for the determination of the benchmark that:

(a) is robust and reliable;

(b) has clear rules identifying how and when discretion may be exercised in the determination of that benchmark;

(c) is rigorous, continuous and capable of validation, including back-testing;

(d) is resilient and ensures that the benchmark can be calculated in the widest set of possible circumstances;

(e) is traceable and verifiable.

2. When developing the benchmark methodology the benchmark administrator shall:

(a) take into account factors including the size and normal liquidity of the market, the transparency of trading and the positions of market participants, market concentration, market dynamics, and the adequacy of any sample to represent the market or the economic reality that the benchmark is intended to measure;

(b) determine what constitutes an active market for the purposes of that benchmark; and

(c) establish the priority given to different types of input data.

3. The administrator shall have in place clear published arrangements that identify the circumstances in which the quantity or quality of input data falls below the standards necessary for the methodology to determine the benchmark accurately and reliably, and that describe whether and how the benchmark will be calculated in such circumstances.

4. Any non-material change to the benchmark in respect of provisions covered in this Article shall not be considered to be a breach of any financial contract or financial instrument which references that benchmark. For a critical benchmark, the relevant competent authority shall have the power to deem a change to be material.

Article 7b

Transparency of methodology

1. The administrator shall transparently develop, operate and administer the benchmark data and methodology.

The administrator shall publish, by means that ensure a fair and easy access:

(i) the methodology used for each of the benchmark or family of benchmarks; and

(ii) the procedure for consulting on, and the rationale for, any proposed material change in its methodology and the rationale for such a change, including a definition of what constitutes a material change and when it will notify users of any changes.

2. Where a benchmark meets the criteria laid down in Article 14a, the administrator of that benchmark shall describe and publish with each calculation, to the extent reasonable and without prejudicing due publication of the benchmark:

(a) a concise explanation, sufficient to facilitate a benchmark subscriber's or competent authority's ability to understand how the calculation was developed including, at a minimum, the size and liquidity of the physical market being assessed (such as the number and volume of transactions submitted), the range and average volume and range and average price, and indicative percentages of each type of input data that have been considered in a calculation; terms referring to the pricing methodology shall be included such as “transaction-based”, “spread-based” or “interpolated or extrapolated”; and

(b) a concise explanation of the extent to which, and the basis upon which, any judgement was exercised including any decision to exclude input data which otherwise conformed to the requirements of the relevant methodology for that calculation; base prices on spreads or interpolation, extrapolation, or weighting bids or offers higher than concluded transactions in any calculation.

3. Where such a publication would not be compatible with applicable intellectual property law, the methodology shall be made available to the relevant competent authority.

4. Where a material change is made to the methodology of a critical benchmark, the administrator shall notify the relevant competent authority of the change. The competent authority shall have 30 days to approve the change.

Article 7c

Regulatory technical standards on input data and methodology

ESMA shall develop regulatory technical standards to specify the controls in respect of input data, the circumstances under which transaction data may not be sufficient and how this can be demonstrated to the relevant competent authorities and the requirements for developing methodologies, distinguishing for different types of benchmarks and sectors as set out in this Regulation. ESMA shall take account of the following:

(a) developments in benchmarks and financial markets in light of international convergence of supervisory practice in relation to benchmarks;

(b) specific features of different benchmarks and types of benchmarks;

(c) the principle of proportionality with respect to non-critical benchmarks;

(d) the vulnerability of benchmarks to manipulation in light of the methodologies and input data used;

(e) that sufficient detail should be available to users to allow them to understand how a benchmark is provided in order to assess its relevance and appropriateness as a reference;

(f) whether requirements are already partially or fully covered by other relevant regulatory requirements, particularly for benchmarks based on regulated data, and particularly but not limited to requirements under Directive 2014/65/EU or Regulation (EU) No 600/2014, so as to ensure no duplication of requirements or other unnecessary burdens for administrators shall result.

ESMA shall submit those draft regulatory technical standards to the Commission by […].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

Article 8

Reporting of infringements

1. The administrator shall have procedures in place for its managers, employees, and any other natural persons whose services are placed at its disposal or under its control, to report internally infringements of this Regulation and other relevant applicable law .

2. The administrator shall have procedures in place to report infringements of this Regulation and other relevant applicable law to the appropriate authorities.

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Chapter 3

Code of conduct and requirements for contributors

Article 9

Code of conduct

1. Where a benchmark is based on input data from contributors, the administrator shall draw up, where possible in collaboration with the contributors, a code of conduct for each benchmark clearly specifying the ▌ contributors’ responsibilities ▌with respect to the contribution of input data and shall ensure submitters confirm their compliance with the code of conduct and reconfirm compliance in the event of any changes to it .

2. The code of conduct shall include at least the following elements:

( a) a clear description of the input data to be provided and the requirements necessary to ensure that the input data is provided in accordance with Articles 7 and 8;

(b) policies to ensure contributors provide all relevant input data; and

(c) the systems and controls that the contributor is required to establish, including: (i) procedures for submitting input data, including requirements for the contributor to specify whether the input data is transaction data and whether the input data conforms with the administrator's requirements; (ii) policies on the use of discretion in providing input data; (iii) any requirement for the validation of input data before it is provided to the administrator; (iv) record keeping policies; (v) suspicious input data reporting requirements; (vi) conflict management requirements.

2a. The administrator may develop a single code of conduct for each family of benchmarks it provides.

2b. Within 20 days from the date of application of the decision to include a critical benchmark in the list referred to in Article 13(1), the administrator of that critical benchmark shall notify the code of conduct to the relevant competent authority. The relevant competent authority shall verify within 30 days whether the content of the code of conduct complies with this Regulation.

3. ESMA shall develop draft regulatory technical standards to specify further the elements of the code of conduct referred to in paragraph 2 for different types of benchmarks, and in order to take account of developments in benchmarks and financial markets.

ESMA, while developing those draft regulatory technical standards, shall take into account the principle of proportionality with respect to different characteristics of benchmarks and of contributors, notably in terms of differences in input data and methodologies, the risks of input data being manipulated, and the international convergence of supervisory practices in relation to benchmarks. ESMA shall consult with ACER, with regard to applicability of codes of conduct in particular with regard to relevant benchmarks.

ESMA shall submit those draft regulatory technical standards to the Commission by [XXX].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first paragraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.

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Article 11

Requirements for supervised contributors

1. The ▌governance and control requirements set out in paragraphs 2a and 3 shall apply to a supervised contributor contributing input data to a critical benchmark.

2. A supervised contributor shall have effective systems and controls in place to ensure the integrity and reliability of all contributions of input data to the administrator, including:

(a) controls regarding who may submit input data to an administrator including, where proportionate, a process for sign-off by a natural person senior to the submitter;

(b) appropriate training for submitters, covering at least this Regulation and Regulation (EU) No 596/2014;

(c) conflict management measures, including organisational separation of employees where appropriate and a consideration of how to remove incentives to manipulate any benchmark created by remuneration polices;

(d) record keeping of communications in relation to provision of input data for an appropriate period of time;

(e) record keeping of exposures of individual traders and trader desks to instruments referencing a benchmark in order to facilitate audits, investigations and for purposes of managing conflicts of interest;

(f) record keeping of internal and external audits.

2a. Where input data is not transaction data or committed quotes, supervised contributors shall, in addition to the systems and controls referred to in paragraph 2, establish policies guiding any use of judgement or exercise of discretion and retain records of the rationale for any such judgement or discretion, where proportionate, taking into account the nature of the benchmark and input data.

3. A supervised contributor shall fully cooperate with the administrator and the relevant competent authority in the auditing and supervision of the provision of a benchmark , including for the purposes set out in Article 5c(3), and make available the information and records kept in accordance with paragraphs 2 and 2a .

4. ESMA shall develop draft regulatory technical standards to specify further the requirements concerning systems and controls set out in paragraphs 2, 2a and 3 for different types of benchmarks.

ESMA shall submit those draft regulatory technical standards to the Commission by [XXX].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.

TITLE III

▌REQUIREMENTS FOR CRITICAL BENCHMARKS

Chapter 1

Regulated data

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Article 12a

Regulated data

Where benchmarks are determined by the application of a formula to data set out in point 11(i) or point 11(ii) of Article 3(1), Articles 7(1)(b), 7(1)(ba), 7(1)(c), 7(2a), 7(3a), 8(1), 8(2), 9, 11 and 13a shall not apply to the provision of and the contribution to such benchmarks. Article 5d(1)(a) shall not apply to the provision of such benchmarks with reference to input data that are contributed entirely as specified in point 11 of Article 3(1). These requirements shall also not apply for purposes of Article 5c(3).

Chapter 2

Critical benchmarks

Article 13

Critical benchmarks

1. A benchmark that is not based on regulated data shall be deemed to be a critical benchmark in the following circumstances:

(a) the benchmark is used as a reference for financial instruments and financial contracts having an average value of at least EUR 500 000 000 000, as measured over an appropriate period of time;

(b) the benchmark is recognised as critical in accordance with the procedure laid down in paragraphs 2a, 2c and 2e-2 g.

ESMA shall develop draft regulatory technical standards to:

— specify how the market value of financial instruments is calculated;

— specify how the gross notional value of derivatives is calculated;

— specify the length of time to be used to measure appropriately the value of the benchmark;

— review the EUR 500 000 000 000 threshold, at least every [three] years after the date of the entry into force of this Regulation.

ESMA shall submit those draft regulatory technical standards to the Commission by [XXX].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.

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2a. A competent authority of a Member State may deem a benchmark administered within its jurisdiction to be critical where it has an average notional value totalling less than the amount set in point (a) of the first subparagraph of paragraph 1 if it considers that the cessation of that benchmark would have a significant adverse impact on the integrity of markets, financial stability, consumers, the real economy, or the financing of households and corporations within its jurisdiction. In such a case, it shall notify ESMA of its decision within five days.

2b. Within 10 days following receipt of the notification provided for in paragraph 2a of this Article, ESMA shall publish the notification on its website and update the register referred to Article 25a.

2c. Where a national competent authority considers that a decision taken pursuant to paragraph 2a by another competent authority in the Union will have a significant adverse impact on financial market stability, the real economy, or supervised contributors to the relevant benchmark in its jurisdiction, it shall issue a request to that national competent authority to reconsider its decision. The competent authority that took the decision pursuant to paragraph 2a shall inform the requesting competent authority of its response within 30 days of the receipt of the request.

2d. In the absence of an agreement between the competent authorities, the requesting competent authority may refer the matter to ESMA. Within 60 days of receiving such a referral request, ESMA shall act in accordance with Article 19 of Regulation (EU) No 1095/2010.

2e. Where a competent authority of a Member State or ESMA considers that a benchmark administered in another Member State with an average notional value totalling less than the amount set in point (a) of the first subparagraph of paragraph 1 should nevertheless be deemed to be critical, as the cessation of that benchmark would have a significant adverse impact on the integrity of markets, financial stability, consumers, the real economy, or the financing of households and corporations within its jurisdiction, it shall issue a request to the national competent authority of the relevant benchmark administrator to categorise the benchmark as critical. The competent authority of the relevant benchmark administrator shall inform the requesting competent authority of its response within 30 days of the receipt of the request.

2f. Following the procedure laid down in paragraph 2e, and in the absence of an agreement between the competent authorities, the requesting competent authority may refer the matter to ESMA. It shall transmit a documented assessment of the impact of the cessation of the benchmark in its jurisdiction, which shall include at least the following:

(a) the variety of use in terms of market participants, as well as use in retail markets;

(b) the availability of a feasible market-led substitute for the benchmark;

(c) the value of financial instruments and financial contracts that reference the benchmark within the Member State and its relevance in terms of the gross national product of the Member State;

(d) the concentration in use and, where applicable, of contribution to the benchmark among Member States;

(e) any other indicator to assess the potential impact of the discontinuity or unreliability of the benchmark on the integrity of markets, financial stability, or the financing of households and corporations of the Member State.

Where ESMA is the requesting competent authority, it shall review its request and issue a binding opinion.

2 g. Within [10] weeks of receiving the notification referred to in paragraph 2d, and after consulting the ESRB and other relevant national competent authorities, ESMA shall issue a binding opinion on the criticality of the benchmark. ESMA shall transmit its opinion to the Commission, the national competent authorities and the administrator, together with the results of the consultations. ESMA shall base its opinion on the criteria listed in paragraph 2f and other relevant criteria.

2h. Once a benchmark has been defined as critical, the college of competent authorities shall be formed pursuant to Article 34.

The college of competent authorities shall request the information needed in order to grant the authorisation enabling this benchmark to be provided under the additional conditions imposed by this Regulation on account of the benchmark being critical, as provided for in Article 23.

2i. The college of competent authorities shall review at least once every two years benchmarks previously classed as critical.

2j. Member States may, in exceptional circumstances, impose additional requirements on any benchmark administrator in respect of the matters covered by this Article.

Article 13a

Mandatory administration of a critical benchmark

1. If an administrator of a critical benchmark intends to cease producing its critical benchmark, it shall:

(a) immediately notify its competent authority; and

(b) within four weeks of such notification submit an assessment of how the benchmark is to be transitioned to a new administrator; or

(c) within four weeks of such notification submit an assessment of how the benchmark is to be ceased to be produced, taking into account the procedure established in Article 17(1).

During that period, the administrator shall not cease production of the benchmark.

2. Upon receipt of the assessment of the administrator referred to in paragraph 1, the competent authority shall within four weeks:

(a) inform ESMA; and

(b) make its own assessment of how the benchmark shall be transitioned to a new administrator or be ceased to be produced, taking into account the administrator's procedure for cessation of its benchmark established in accordance with Article 17(1).

During that period of time, the administrator shall not cease production of the benchmark.

3. Following completion of the assessment under paragraph 2, the competent authority shall have the power to compel the administrator to continue publishing the benchmark until such time:

(a) as the provision of the benchmark has been transferred to a new administrator; or

(b) as the benchmark can be ceased in an orderly fashion; or

(c) as the benchmark is no longer critical.

The competent authority may compel the administrator to continue to publish the benchmark for a limited period of time not exceeding six months, which the competent authority may extend where necessary by up to a further six months.

Article 13b

Mitigation of market power of critical benchmark administrators

1. The administrator, in controlling the provision of the critical benchmark, shall have due regard to the principles of market integrity and benchmark continuity including the need for legal certainty for contracts which reference the benchmark.

2. When providing the critical benchmark for use in a financial contract or a financial instrument, the administrator shall ensure that licences of, and information relating to, the benchmark are provided to all users on a fair, reasonable and non-discriminatory basis, as outlined in Article 37 of Regulation (EU) No 600/2014.

Article 14

Mandatory contribution to a critical benchmark

1. The administrator of one or more critical benchmarks based on submissions by contributors the majority of which are supervised entities shall, every two years, submit to its competent authority an assessment of the capability of each critical benchmark it provides to measure the underlying market or economic reality.

2. If one or more supervised contributors to a critical benchmark intend to cease contributing input data to that critical benchmark, they shall promptly notify in writing the administrator of the critical benchmark and the relevant competent authority. Within 14 days of receipt of such notification, the administrator shall inform the competent authority and provide an assessment of the implications of the cessation on the capability of the benchmark to measure the underlying market or economic reality. The administrator shall also inform the remaining supervised contributors to the critical benchmark of the notice to cease contributions and seek to