knowledge 25 October 2023 |

EU Benchmarks Regulation: final extension of transition period for third-country benchmarks

On 23 October 2023, a Delegated Regulation1 (here) extending the transition period for use of third-country benchmarks in the EU, in accordance with Article 51(5) of the Benchmarks Regulation2 (“BMR”), was published in the EU’s Official Journal. The transition period will now run until the revised deadline of 31 December 2025.

Background

Benchmarks are integral to financial markets.  They serve as reference rates, used to price a large variety of financial instruments and financial contracts, or to measure the performance of investment funds.

The BMR, which was adopted in 2016 and entered into force in 2018 subject to certain transitional periods, contains rules on use, within the EU, of benchmarks administered in third countries.  Since most benchmarks are produced by administrators outside the EU3, the framework is of critical importance to EU financial markets.  Following consecutive deferrals, rules under the BMR were due to take effect from 1 January 2024, but have now been deferred to 1 January 2026.

Under the BMR, following expiry of the transition period, EU supervised entities would only be able to use benchmarks produced or administered in a third country if the third country concerned has a framework equivalent4 to that of the EU, or if the third-country benchmark is endorsed5 by an EU benchmark administrator, or if the benchmark is recognised6 in the EU.

For information on the BMR more generally, see our Q&A document (here) and our previous briefing (here).

Extension of the Transition Period

An assessment (here) by the European Commission highlighted that a majority of third-country benchmark administrators have not, thus far, taken sufficient steps to prepare for new rules under the BMR to take effect.  Consequently, without an extension of the transition period, EU market participants would risk a scenario where, by year-end, they would not be able to access most global benchmarks, placing them at significant competitive disadvantage, and creating financial stability risks.

Thus, the Commission has decided to extend the transition period until 31 December 2025, affording market participants more time to prepare for changes, and ensuring legal certainly and business continuity.

Extension of the transition period takes effect against the backdrop of a wider review of the BMR.  The European Commission has recently published a proposal (here) which may see the scope of the BMR’s third country benchmark regime being significantly narrowed.  Subject to the legislative process, the aim is for that revised regime to come into force as the extended transition period expires.

Comment and Next Steps

The European Commission’s timely decision to extend the transition period for the use of third-country benchmarks is to be welcomed as it ensures EU market participants will not be faced with a cliff-edge scenario at year-end.

The transition period will now run until the revised deadline of 31 December 2025.  In parallel, EU institutions will negotiate proposals to amend the BMR framework, to address concerns raised in respect of the accessibility of EU markets, with the aim of agreeing revised rules on the use of third-country benchmarks that take effect from 1 January 2026.

Also contributed to by David O’Keeffe Ioiart

  1. Delegated Regulation (EU) 2023/2222.
  2. Regulation (EU) 2016/1011 (here).
  3. Report of the European Commission on the scope of Regulation (EU) 2016/1011, in particular with respect to the continued use by supervised entities of third-country benchmarks and on potential shortcomings of the current framework (here).
  4. Article 30 BMR.
  5. Article 33 BMR.
  6. Article 32 BMR.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.