Joe Kavanagh, CFA, head of performance measurement and risk analysis, KBI Global Investors
I am looking forward to my participation in the Performance Measurement Americas (PMA) 2018 panel discussion entitled “Get Ready for the EU’s Benchmarks Regulation,” which will take place March 9 at 1:50 p.m. in New York.
With a certain degree of Irish humor, I’ve described this new regulation to colleagues in my firm as a “forgotten child.” MiFID II has been by far the greater focus of attention for global investment firms over the past year and to some effect— even with a common live date — this new benchmarking initiative has been somewhat forgotten.
So, why should a U.S. audience be interested in an E.U. regulation?
There will be firms in the room that will have some marketing outreach directed toward Europe, and if that marketing material is publicly available and contains a benchmark return then — guess what? — this regulation likely does affect your marketing effort.
The new regulation defines three parties covered by the new regulations — administrators, contributors and users.
I’ll speak now from the perspective of a benchmark user in answering the question: “And what effect will that be to me?”
Benchmark administrators will have to go through an approval process over the next couple of years for their benchmarks with the European regulator.
From January 1, 2020, the regulations become fully effective and investment firms from that date must not use unregulated benchmarks in the European Union.
So, within the two-year interim, investment firms may continue to use these benchmarks in publicly available materials. After the dead
line, though, the benchmarks have to be approved.
The new regulations require that investment firms now draw up an inventory of benchmarks they currently use. Firms will have to determine alternative
benchmarks if the preferred benchmarks are no longer available, either because they failed the approval process or have been withdrawn from the market. Firms will also need to have robust written plans for the cessation or material changes of a benchmark. They will also have to reference these alternative benchmarks in the contractual relationship with clients.
We have yet to see what the view of local national regulators in the E.U. is on these regulations and how they will apply them in their local jurisdiction.
Certainly, the regulations only cover those benchmarks used within the E.U. What is equally certain is that if a benchmark determines the value of an investment product (passive management, ETF’s, derivatives falling under this category), or is used within a performance fee arrangement, and/or defines the asset allocation of a portfolio, then the benchmark falls within the new approval and use regime.
There has been a lack of clarity about whether the use of a benchmark return as a performance comparator will also be swept into the remit of the new regulations.
Only in the last 10 days, in a Q&A release, the European Securities and Markets Authority (ESMA), the European regulator, provided some welcome clarification that the use of a benchmark as a comparator in documentation such as a factsheet is out-of-scope of the regulations.
Only time will tell whether national regulators in the E.U. agree!
Joe Kavanagh, CFA, is head of performance measurement and risk analysis at KBI Global Investors. The views expressed are his own. He will be a panelist for the “Get Ready for the EU’s Benchmarks Regulation” session at PMA 2018.
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