BMR: “entirely and directly”

13 April 2018

Background

The EU benchmark regulation (the BMR), formally known as Regulation (EU) 2016/1011, came into force in January 2018 but is being implemented over a transitional period of two years.

Foxberry is a long-standing supporter of the BMR as it aligns well with the values and principles of Foxberry's business model. As an early adopter of the BMR, Foxberry became one of the first firms to test how certain BMR definitions should be interpreted.

In what we believe is an attempt to distinguish between different type of benchmarks and the regulatory risk they pose, the BMR introduces the concept of a regulated-data benchmark. A regulated-data benchmark benefits from a streamlined regulatory treatment. Broadly speaking, a regulated-data benchmark is a benchmark that consists only of input data coming from certain regulated sources such as trading venues.

 

What constitutes “directly”?

When defining a regulated-data benchmark, BMR Article 3(1)(24a)(vii) states that input data should be contributed entirely and directly from a number of regulated sources, including trading venues which we will focus on in this post.

The key word here is directly.

If you were to contact a trading venue to purchase transactional data, they would typically refer you to one of their data vendors. Data vendors are the wholesalers of trading data and are experts at global data licensing, aggregating data and providing high availability data services.

This raises the question: If you receive data with respect to a trading venue through a data vendor, does that constitute to receive the data directly from the trading venue itself?

Our view is that the data vendor is simply a technical means of access, similar to how you would use a courier service to deliver a package. The data vendor aggregates data and enables benchmark administrators to access the data unprocessed, in its raw form.

During Foxberry's application process to become registered under the BMR, it became clear that the use of a data vendor is currently not considered as receiving the data directly from the relevant trading venue.

 

Outsourcing data collection

One way of potentially resolving this, is to rely on the fact that the BMR makes certain provisions that lets a third-party service provider conduct the actual data collection. This is allowed, provided that the such service provider receives the data entirely and directly from the relevant trading venue. This data collection would also be subject to oversight requirements by the benchmark administrator of such service provider. If a benchmark administrator were to rely on this provision, it would in all likelihood require that the benchmark administrator enters into an agreement with the data vendor to allow for the required oversight.

However, BMR Article 3(1)(24a)(vii), which allows for a service provider to conduct this data collection, does not allow the service provider to receive in turn the data from another service provider. According to this provision, the data must in such case be sourced entirely and directly from the relevant trading venue. It is, in our view, unclear if it is the regulator’s intention to disallow multiple layers of service providers with regards to data collection, or if in fact a multi-step outsourcing setup of data collection should be allowed under the general outsourcing provisions in BMR Article 10. Our view would be that a multi-layered outsourcing setup should probably be allowed under BMR Article 10, but nevertheless the industry would benefit from clarification on this matter.

 

Consequences of a strict interpretation

Some of the potential consequences of this strict interpretation of “directly” are:

  1. Data vendors are increasingly operating their own benchmark administrator businesses. In practice, it will be effortless for such data vendor to classify its own benchmarks as regulated-data benchmarks. However, for other benchmark administrators, who uses a data vendor to source the input data, they will have to demonstrate sufficient oversight of the data vendor, which in practice in all likelihood will require governing agreements and cooperation from the relevant data vendor. It remains to be seen, to what extent data vendors will be willing to facilitate such arrangements with competing benchmark administrators. Hence, for benchmark administrators not affiliated with a data vendor, the regulated-data benchmark classification could effectively become an empty seat.[1]
  2. Identical benchmarks could have different classifications, if provided by different benchmark administrators. For instance, if benchmark A is provided by a data vendor and benchmark B is provided by a typical benchmark administrator that receives the input data via a data vendor, then benchmark A would be a regulated-data benchmark whilst benchmark B would not be.
  3. Consider the case where a benchmark administrator uses a separate benchmark calculation agent for the calculation of a benchmark, for instance for the purpose of a UCITS tracker fund. For example: Benchmark Administrator A uses Calculation Agent B to calculate the benchmark, who sources data from Data Vendor C. Such setups are actually an important part of decreasing conflicts of interest, and are actively encouraged by other parts of the BMR as well as the UCITS benchmark rules. If multiple layers of service providers are not allowed, for instance by applying the outsourcing provisions of BMR Article 10, then regulated-data benchmarks are effectively not possible in this type of setup.

 

Bringing clarity

We think the industry would benefit from clarification by ESMA around these two points:

  1. Does the use of a data vendor result in the input data to not be considered as sourced directly?
  2. If so, does the provision of BMR Article 3(1)(24a)(vii) allow for multiple steps of outsourcing data collection, i.e. through the use of BMR Article 10?

We are raising these questions as it is our view that it is important the BMR is implemented in homogeneous manner across the EU.


Footnotes

  1. ^ There is a potential solution to this if data vendors start to offer the relevant data under a MIFID II “approved publication arrangement” or “consolidated tape provider” status, but one could question the proportionality of this setup if the only aim of this is to pass through unprocessed data in a raw form from a regulated trading venue. Certain data vendors are operating separate “approved publication arrangements”, but that does not mean all data sourced from such data vendors shall be deemed to be coming from an approved publication arrangement.

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