1 00118601 Emerging themes 2019 A4 AW v31 combined - Page 55



EMERGING THEMES 2019
The BMR sets out a regulatory framework for providers
of benchmarks (administrators), contributors of input
data to a benchmark (contributors) and users of
benchmarks alike. It has a surprisingly broad scope.
All supervised entities in the EU (including banks,
investment firms and Alternative Investment Fund
Managers pursuant to the AIFM Directive) are affected
by the BMR, given the endless number of instruments
using indices (for example, to determine interest rates,
as underlying derivatives, or to ascertain the
performance fee of a fund manager).
Need to act
Supervised entities will, broadly speaking, only be
allowed to use benchmarks from 1 January 2020
onwards if the benchmark complies with the BMR
and is administered by an authorised or registered
benchmark administrator. Benchmarks that do not
comply with those requirements will not be able to
be used, resulting in the need to change affected
agreements and instruments before January 2020. In
particular, banks and investment firms issuing securitised
derivatives, and supervised counterparties to over-thecounter (OTC) derivatives, need to prepare for this.
Emergency plans
The BMR obliges supervised users to develop emergency
plans by preparing robust, written plans setting out the
actions that they would take in the event of cessation or
transition of an index, or if an index is no longer eligible
for use under the BMR. Given the plans for the cessation
of both LIBOR and EURIBOR, emergency plans may
well need to be applied wholesale across the financial
services industry. Further, the impact of Brexit needs to
be considered: UK benchmark administrators might not
be able to obtain proper registration as a third country
provider (i.e. a non-EU administrator) by January 2020.
The Benchmarks Regulation aims to
ensure the accuracy, robustness and
integrity of benchmarks and of the
benchmark determination process.
BERND GEIER
Partner, Frankfurt
Action plan?
Emergency planning needs to cater for the different
kinds of products using benchmarks.
The International Swaps and Derivatives Association
(ISDA), for example, published its Benchmark Supplement
on 19 September 2018. The document seeks to address
requirements under the BMR but is drafted generically
to also address market participants outside the scope
of the BMR. In the same vein, an updated version of the
German Master Agreement is also available, providing
rules to address cessation and transition of indices. As
the German Master Agreement does not provide for a
protocol mechanism, the new rules will need to be
negotiated with each counterparty.
Other contracts may also provide for rules dealing with
substitute benchmarks or other mechanisms addressing
the cessation of an index. However, those rules often
do not fully address the economic issues of the parties
involved, as they have usually been drafted with a view
to other potential scenarios (in particular the temporary
unavailability of an index). As a result, both parties might
have a significant commercial interest in not applying
those provisions, but rather negotiating a tailored
solution. If the parties did not envisage the cessation risk
at the time the contract was entered into, under German
law, there might, for example, be valid reasons for a
legal right of each party to request an amendment
of the agreement in line with what parties would have
entered into had they foreseen the issue when originally
negotiating the agreement.
With regards to bonds, even more complex issues
might arise, such as the need to call for a bond holder
assembly. Depending on the kind of bonds in question,
consent of all bond holders might be mandatory to
change terms. In some cases, there might even be
a need to consider a public exchange offer to address
the BMR risk. All of this could amount to a practical
impediment for compliance with the BMR – and in any
case requires early planning.
In summary
All users of benchmarks need to identify those
instruments that are dependent on benchmarks and
plan their critical next steps to minimise any potential
disruption to their businesses. These steps need to take
account of the January 2020 deadline under the BMR
– but also take into account the planned cessation
of LIBOR and EURIBOR and the impact of Brexit.
JÖRG MARCINIAK
Associate, Frankfurt
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