The Recognition pathway is being considered by third country benchmark administrators as a viable alternative route to Equivalence.
A key issue for third country benchmark administrators who decide to take this route is to determine, based on the criteria, which competent authority in an EU Member state should be approached for the Recognition route. GRSS can assist in understanding usage of benchmarks by EU supervised entities.
Another key issue is the setting up of a legal representative and liaison resource in the European Union in the relevant Member state. GRSS, through its operations in Europe and its 100% subsidiary, Czech Financial Benchmark Facility s.r.o. can assist in providing such services on a contracted basis.
From a project planning perspective, these are the steps necessary to go through to meet the Recognition route. The BMR stipulates timeframes for decisions to approve by the EU member state competent authority, but all other steps are not defined by any time restraints.
The steps necessary to meet Recognition are as follows;
Interim arrangement prior to Equivalence decision as per Article 30
A benchmark provided by a third country administrator can be used in the EU if the administrator acquires prior recognition by the competent authority of the Member State of reference
Member State of reference determined:
Where third country administrator is part of a group that contains one supervised entity in the EU the member state of reference shall be the member state where that entity is located. Such supervised entity will be appointed as the legal entity as per paragraph 3 of Article 32
As point above where the group has more than one supervised entity in the EU the member state will be the one with the most number of supervised entities. If same number then the one with the highest value of financial instruments, contracts or investment funds. Such supervised entity will be appointed as the legal entity as per paragraph 3 of Article.
If the benchmarks are used as a reference for financial instruments on an EU trading venue, then the member state will be where the financial instruments were first traded and still traded
If the above don’t apply then the member state will be where the highest number of supervised entities using the benchmark are located, or if equal number then highest value of financial instruments, number of financial contracts or investment funds
If only one supervised entity using the benchmark then member state is where that entity is located
Administrator must comply with BMR by demonstrating compliance with ISOCO Principles. Exceptions to BMR must be met by meeting equivalent requirements in IOSCO Principles. Exceptions are:
Article 11(4) – Input data doesn’t represent market or economic reality the benchmark measures
Article 16 – Governance and control requirements for supervised contributors
Article 20 – Critical benchmarks
Article 21 – Mandatory administration of critical benchmarks
Article 23 – Mandatory contribution to a critical benchmark
Compliance with IOSCO Principles demonstrated through assessment by an independent external auditor, or if the administrator is supervised then certification by the supervising competent authority
Third country administrator must have a natural or legal representative established in its Member State of reference. That representative is accountable to the competent authority in the Member State of reference for benchmark oversight
Competent authority will verify within 90 days of receipt of application that the conditions for compliance are met. Additional requirements:
Where the third country administrator is supervised in the third country a cooperation agreement must be in place between the Member State of reference competent authority and the third country competent authority for efficient sharing of information
No third country laws, regulations or administrative provisions prevent the competent authority exercising its supervisory functions
If the competent authority receiving the application considers that the third country administrator is providing a Significant or Non-significant benchmark it shall without delay notify ESMA. The 90-day ‘clock’ will stop during the period while ESMA decides (within one month) the type of benchmark and applicable requirements
The competent authority can grant recognition contrary to ESMA’s advice provided it supplies ESMA with its reasons. Such reasons may be published by ESMA
Competent authority will inform ESMA of a decision to recognise a third country administrator within 5 days of the decision
Competent authority may suspend or withdraw recognition if the administrator is acting in a manner prejudicial to the interest of the users of the benchmark or the orderly functioning of markets
ESMA Technical Standards determine the form and content of applications
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