Early in the evening of Thursday 12 December, negotiators from the European Parliament and the Hungarian Presidency of the Council of the European Union reached a provisional Interinstitutional Agreement on the revision of the rules governing reference indices used in financial instruments and contracts.
At the end of two trilogue negotiating sessions prepared by ten or so technical trilogues, MEPs obtained increased powers for the European Securities and Markets Authority (ESMA).
At present, the European authority oversees the operation of: - indices considered critical and significant from a systemic point of view, i.e. when they are used as a benchmark for trading with a total value in excess of €50 billion; - indices from third countries.
With the approved reform, ESMA will approve and supervise the activities of ‘EU administrators’ who have endorsed indices provided in a third country.
“The position in the Council from the beginning was that they’d never accept any change in the current framework [for supervision]. We thought we needed it”, European Parliament rapporteur Jónas Fernández (S&D, Spanish) told Agence Europe on Friday 13 December. He also indicated that MEPs would have liked ESMA to have jurisdiction over the supervision of indices used on a cross-border basis. But the EU Council refused.
Indices linked to climate action (EU PAB, EU CTB) and those linked to commodity prices will remain within the scope of EU legislation. The European Parliament and EU Council negotiators also decided to maintain in EU law a specific exemption regime for spot foreign exchange benchmarks.
Opt-in. In its initial proposal, the European Commission envisaged that non-systemic indices would no longer be supervised in accordance with EU rules, in order to reduce the administrative burden on national supervisors.
“During the negotiations, many administrators asked us for keeping them under the umbrella of the supervision. They think they are more credible that way” with financial players, noted Mr Fernández. At the instigation of MEPs, the EU Council accepted the introduction of an opt-in mechanism for benchmarks used as references for a trading volume of “between €20 and €50 billion”. If this is the case, index administrators will be able to apply to the national authorities to be supervised in accordance with EU rules.
The inter-institutional negotiations also focused on how to calibrate an index to determine whether the trading volume referred to therein exceeds the €50 billion threshold. Mr Fernández mentioned the case of interest rate “index families” whose calibration encompasses different maturities. In his view, the calibration should also include indices based on different currencies or different types of income.
It will be up to the Commission to draw up a delegated act on this issue.
ESG. With regard to benchmarks linked to environmental, social and governance (ESG) factors, the Commission will have to specify the information and the standard format to be used for references to ESG factors in order to enable investors to make informed choices and to guarantee the technical feasibility of compliance.
In addition, the EU Council and Parliament agreed that supervised entities would only be allowed to use EU and third country ESG-related benchmarks in their methodology if the administrator of the benchmark discloses certain information.
“By targeting mainly benchmarks that are significant and those using European climate labels, this agreement will reduce the regulatory burden on smaller benchmark administrators”, said European Commissioner for Financial Services Maria Luís Albuquerque in a statement.
The provisional political agreement still has to be ratified by the two EU institutions. (Original version in French by Mathieu Bion)