Three layers of regulatory compliance burden governments, businesses, financial institutions, and other organizations.
Internal Regulations – The information governance body within an organization creates authorized use policies (AUP) for their own employees to assure consistent and accountable use of information.
Commercial Regulations – Exchanges, global banks, and other financial service providers impose specific limitations on the use of licenses to their products. Any organization brokering or aggregating these services imposes similar regulatory requirements.
Government Regulations – Charged with protecting the privacy and security of consumer and institutional information, governments have been introducing more and more regulatory acts than ever before, and enforcement of these acts includes the potential imposition of significant fines for failure to comply.
Effective Benchmark Governance
The coming together of governments and organizations to make wholesale changes to the governance of benchmarks has resulted in the development of regulations that ensure consumer confidence in this crucial component of the finance industry.
The European Benchmark (BMR) regulation was created in response to various scandals relating to interest rate benchmark manipulation, including the scandal in which various traders were arrested for conspiring to manipulate the LIBOR benchmark, a core component in computing interest rates for mortgages and other financial products, making it the foundation of many financial services.
BMR came into full effect on January 1, 2020, requiring financial services firms on the buy-side, sell-side and custodians to implement governance processes to enable auditing of their benchmark usage. Utilizing benchmarks not administered by a registered and authorized EU administrator can now result in the imposition of serious fines in Europe.
Calero-MDSL Steps in to Help
The Calero-MDSL Index License Manager (ILM) was originally built to help document and manage index license expenses for market data managers.
In response to the introduction of the BMR, Calero-MDSL has evolved and extended ILM to assist financial firms in meeting new benchmark management requirements from the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO).
ILM now helps firms meet these regulatory obligations by providing a management tool that tracks benchmark usage serving as a repository for all license agreements, indexes and families, and catalogs from third party index aggregators. These features allow firms to match indices onto their own portfolio of benchmark usage for funds, structured products, data licenses for users, and more.
Incorporating and mapping BMR status information from the ESMA register allows firms to check that benchmarks are being used in accordance with the regulation, providing information on which products are using authorized benchmarks and, if not, what their authorized substitutes should be. Also tracked are the named authorized administrators with their competent authority, status, and EU endorsing administrator. ILM can also integrate with a variety of other financial tools, such as pre/post-trade reporting systems, to allow them to check the authorization status of indices used in transactions on index linked products.
During development ILM as a benchmark manager has been successfully implemented for a large France-based investment bank, with various other benchmark-consuming institutions currently piloting or implementing similar solutions.
Beyond Europe, IOSCO has published “Principles for Financial Benchmarks” which also recommends that firms implement management processes for indices, benchmarks and fixings where they are used in creation of funds or structured products. This includes many of the same requirements as BMR, such as the documentation of substitute benchmarks as part of contingency planning, in the event the primary benchmark becomes unavailable for use. Documentation of such information is best placed in ILM, an auditable database specialized for this purpose.
Talk to Calero-MDSL
If you’re using benchmarks to apply indices to certain products, have a conversation with Calero-MDSL about how ILM can help you avoid stiff fines, provider penalties, and internal strife by maintaining full compliance with all three layers of regulatory requirements.