Interview for LexisNexis regarding Regulated Benchmarks
What is the background to this Policy Statement?
On 1 April 2015, following the Government's response to implementing the Fair and Effective Markets Review's recommendations on financial benchmarks, the FCA brought seven further benchmarks into the scope of regulation. This brought the total number of UK regulated benchmarks to eight.
The Financial Conduct Authority (FCA) released a consultation paper on 3 June 2015 (CP15/18) setting out proposals for fair, reasonable and non-discriminatory (which the FCA defines as "FRAND") access to regulated benchmarks. The FCA set out that the eight regulated benchmarks are the most widely used benchmarks in the markets which they relate to, so much so that market participants may not in fact be able to switch to an alternative.
This is a concern as "benchmark administrators" (i.e. a person who has authorisation to carry on the regulated activity of administering a specified benchmark) may hold significant market power such that they are able to vary the commercial terms of arrangements with market participants with limited fear of them switching to an alternative. The FCA confirms that there is a risk therefore that a benchmark administrator could exploit their market power in a way to adversely affect competition.
In CP 15/18, the FCA set out proposed "FRAND" requirements to limit the extent to which benchmark administrators can exploit their market power. The intention was for these rules to apply to arrangements with all users of benchmarks. In summary, the FCA proposed that access to benchmarks should always be granted on a "FRAND" basis, particularly with regard to price.
Policy statement (PS16/4) follows up on CP15/18 by summarising the responses received from market commentators and amending the proposals on the basis of these response. It also sets out in full the final amendments ot the FCA Handbook text applying.
What should firms be particularly aware of?
1. Who the new rules will apply to:
In preparing PS16/4, the FCA considered that the proposed "FRAND" requirements were similar to the rules set out a Article 37 of the Markets in Financial Instruments Regulation (MiFIR). These will apply only to access to benchmarks by central counterparties and trading venues however (rather than all benchmark users, as proposed by the FCA in CP 15/18). The FCA also considered the current EU proposal for a European-wide Benchmarks Regulation.
The FCA set out in PS16/4 that, on reflection, they have decided to await finalisation of the EU Benchmarks Regulation before applying "FRAND" provisions to all users. Therefore, at first instance, the FCA will initially align the scope of users covered by the proposals with Article 37 MiFIR. This means that, in summary, the "FRAND" requirements will at first instance apply only to central counterparties, multilateral trading facilities and regulated markets (Relevant Users). Therefore the FCA is effectively bringing forward the expected implementation of Article 37 MiFIR to 2016.
Should the EU Benchmarks Regulation contain "FRAND" requirements for a more diverse range of benchmark users, the FCA will extend the coverage of FRAND provisions to cover those users.
2. When will the new rules come into place?
On 1 April 2016.
The FCA confirmed in CP15/18 that the FRAND rules will apply to existing and future pricing and licensing arrangements. This means that the FCA will not ask for adjustments to fees incurred prior to the rules coming into force. In addition, parties to existing contracts will not need to negotiate fees already incurred for services already provided.
However, prices for existing arrangements must be FRAND once the rules enter into force, which means that existing contracts may need to be reviewed.
3. What are the rules applying to benchmark administrators?
Benchmark administrators must make sure that Relevant Users are granted non-discriminatory access to: (a) relevant price and data feeds and information on the composition, methodology and pricing of the specified benchmark; and (b) licences or other arrangements to use that specified benchmark, for the purpose of clearing and trading by the Relevant Users.
Access to the benchmark must be granted: (a) on a FRAND basis; and (b) without undue delay, following a written request from the user (the FCA has confirmed that this should be within three months of the written request).
Where a benchmark administrator charges a Relevant User a fee for access, this must be at a reasonable commercial price (taking into account the price at which access is granted (or IP rights are licensed) to other users. Different fees can be charged to different Relevant Users only where this is objectively justified having regard to reasonable commercial grounds such as the quantity, scope or field of used required.
In assessing whether the terms of access to a benchmark are "FRAND", the FCA may consider:
(a) the degree of current and potential competition in the market for the supply of the benchmark;
(b) whether the aggregate of the fees charged to users of the benchmark bears a reasonable relationship to the costs and risks of producing the benchmark. This includes a "reasonable return on capital";
(c) where the benchmark administrator (or a member of its group) is active on a downstream market, whether the terms of access granted for the benchmark would prevent a competitor from competing effectively on that downstream market on a lasting basis; and
(d) whether a benchmark administrator applies dissimilar conditions to equivalent transactions with users or different categories of users, thereby placing them at a competitive disadvantage.
Has the FCA dealt with industry concerns in the final Policy Statement?
The FCA responded to the issues raised by commentators in detail in PS 16/4. At a very high level however:
Respondents to CP 15/18 raised concerns about inconsistency with future regulation such as MiFIR and the EU Benchmarks Regulation. The FCA took these concerns on board and has chosen, for now, to extend the FRAND rules to the provision of access to benchmarks to Relevant Users only. As mentioned above, the initial proposals in CP 15/18 were to extend the FRAND requirements to all users of benchmarks. This is the major shift in policy set out in PS 16/4.
Certain benchmark commentators felt that the CP 15/8 proposals were too wide that the FCA's existing competition powers should be sufficient to address concerns. The FCA responded confirming they felt the rules were necessary and relevant. They also confirmed that the rules leave benchmark administrators freedom to negotiate commercial terms provided that these fall within FRAND requirements.
Commentators also warned against regulating pricing in general. In addressing this, the FCA confirmed that the FRAND rules are not formulaic and leave some discretion to benchmark administrators to determine prices in a commercial way.
There were certain concerns raised about terminology within CP 15/8 which commentators found unclear. The FCA has provided guidance on such terminology in PS 16/4 to address these concerns.
What actions do firms need to take in light of this Policy Statement?
Benchmark administrators need to assess all existing arrangements with Relevant Users to ensure that these fulfil the FRAND requirements set out above. Benchmark administrators should also consider redrafting their standard terms to ensure that these are FRAND compliant.
In particular, benchmark administrators should consider whether they are giving each and every user non-discriminatory access to data feeds and information. They will also need to look at fees charged to ensure that every fee represents a reasonable commercial price for access to the benchmark.
In addition, benchmark administrators will need to look at streamlining their customer take-on process to ensure they can give every customer access within three months of a written request.
What practical advice can lawyers give firms regarding this Policy Statement?
For benchmark administrators, we suggest that these firms carry out a detailed review of existing and template commercial terms as a matter or urgency. It may take some time to review arrangements and renegotiate existing terms to make them FRAND compliant (if necessary), bearing in mind the 1 April 2016 implementation deadline.
Where a decision is made not to renegotiate or redraft an arrangement (on the basis that the benchmark administrator considers it to be FRAND compliant in its current state) this should be documented and reasons specified for why the decision was taken.
On the flipside, Relevant Users should be aware that their contractual arrangements for access to benchmarks should be FRAND compliant from 1 April 2016. If any such users are unhappy with their existing arrangements with benchmarks, this is a good opportunity to seek to negotiate them. In particular, if Relevant Users believe that the charges for the benchmarks they access are too high, they can challenge these if they can demonstrate that the charges are not being set at a "reasonable commercial price".
This article was written by Jessica Arrol.
For more information, please contact Jessica on +44 (0)20 7427 6709 or firstname.lastname@example.org.
News & Insights
Points of practice: placings, acquisitions and MAR
This article looks at some important MAR related points when you are looking to fund an acquisition using proceeds from a placing.
FCA’s Dear CEO letter to Wealth Managers – Focus on Best Execution
On 13th June, the FCA wrote a letter to wealth managers about the risks that the management and stockbroking firms pose to their customers.
Charles Russell Speechlys advises the shareholders of Henshin Group Limited on the investment by Veos S.P.A.
Charles Russell Speechlys advised the shareholders of Henshin Group Limited on a major investment by Veos S.P.A.