A way for non-EU benchmarks to keep a toehold in the EU?

The Presidency of the Council of the EU published the last compromise proposal for regulation of benchmarks, dated 21 November 2014.

On that same day, the chairman of the CFTC criticised the EU benchmark initiative as it left no viable space to foreign benchmarks within the EU. Yet, from a version to another, the series of proposals indicate an effort to address this issue.

From the very start, the proposal provided for the traditional “equivalence decision” process, much like the one found in EMIR. This process depends on the existence of a substantially equivalent framework in non-EU jurisdictions. As only a very limited number of jurisdictions have shown interest in establishing a framework for benchmarks, the equivalence path was insufficient.

Then, the version dated 27 October 2014 provided an alternative in the form of an “endorsement regime”. In certain circumstances, an administrator located in the EU could “endorse” a non-EU benchmark administrator. Nonetheless, this path was not open to all, as the regime could work only with an endorsing administrator or an index provider belonging to the same group.

The last version provides for a third route, in appearance more practical. The “recognition of an administrator located in a third country” would permit a non-EU benchmark administrator to designate a legal representative located in the EU to act on its behalf. The representative would be located in a reference member state, i.e. where the benchmark has the strongest connection in light of certain criteria.

The representative would act vis-à-vis the authorities and any other person in the EU with regard to the administrator`s obligation under the regulation. In particular, the legal representative would be required to perform the oversight function together with the administrator.

This alternative appears like an Eldorado, but there is a catch. No recognition could be granted unless an “appropriate cooperation arrangement” is in place between the authority in the EU and the third country authority. In addition, the supervision by the authority in the EU should be “neither prevented by the laws, regulations or administrative provisions of the third country of location of the administrator, nor by limitations in the supervisory and investigatory powers of that third country’s supervisory authority.”

It is unclear how a foreign authority could enter into such a “cooperation” arrangement without having itself a regulatory framework on benchmarks. At best, it could be perceived as one-way transmission of information, at worst it may be perceived as a form of deference.

Cross-border regulation is clearly paved with many pitfalls. In this context, the equivalence decision, the endorsement regime or the new recognition mechanism seem to be part of a trial and error exercise which started with Dodd-Frank and EMIR. In the future, this thorny issue could be addressed in a more thoughtful way as IOSCO recently published a Consultation Report on cross-border regulation, in which a number of different approaches are envisioned.

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