Critical Benchmarks (References And Administrators’ Liability) Act 2021

Legal background

Regulation of benchmarks in the UK

36. In 2009, the Financial Services Authority (FSA), together with regulators and public authorities in a number of different jurisdictions – including the United States, Canada, Japan, Switzerland and the European Union – began investigating a number of institutions for alleged misconduct relating to LIBOR and other benchmarks. Following the announcement of findings against Barclays in late June 2012, the Government asked Martin Wheatley, Managing Director of the FSA and CEO-designate of the FCA, to establish an independent review into a number of aspects of the setting and usage of LIBOR. In 2012, the Government accepted all recommendations of the Wheatley Review and amended the Financial Services and Markets Act 2000 (FSMA) through the Financial Services Act 2012 (the 2012 Act). Under the 2012 Act, the administration of and contribution to LIBOR became regulated activities. From 1 April 2015, the FCA began applying regulatory requirements to seven additional major UK-based financial benchmarks following the recommendations of the Fair and Effective Markets Review 1 .
37. The UK regulatory regime for these eight benchmarks (including LIBOR) was replaced by Regulation (EU) 2016/1011 ("Benchmarks Regulation") on 1 January 2018. The Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 (S.I. 2018/135) (which implemented aspects of the EU BMR in UK law) provided for the dual operation of the pre-and post-EU BMR regulatory regimes for benchmarks.
38. The EU BMR introduced a regulatory framework to ensure the accuracy, robustness and integrity of benchmarks used in the EU. The EU BMR significantly widened the scope of benchmark regulation in the UK. It places regulatory requirements on administrators of benchmarks, supervised contributors to benchmarks and supervised entities that use benchmarks. These requirements relate to benchmark methodology, governance and transparency.
39. At the end of the EU Exit Transition Period, the EU BMR formed part of retained EU law and continues to apply in the UK. In order to ensure that the regime continued to work effectively, the BMR was amended via the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/657).

Key definitions and scope

40. Under Article 3(3) of the BMR, a benchmark is defined as an index referenced to determine the amount payable under a financial instrument or a financial contract, the value of a financial instrument, or the performance of an investment fund. A critical benchmark is a benchmark that meets certain qualitative and quantitative criteria stipulated in Article 20 of the BMR. Where certain thresholds are met, the benchmark triggers the criteria to be designated a critical benchmark by HM Treasury. Where certain other listed criteria are met, or where a combination of these criteria are met, a benchmark can also be designated as critical if the FCA has recommended that the benchmark is recognised as critical and HM Treasury considers that the FCA’s assessment in this regard complies with Article 20(3).
41. Under Article 23A of the BMR, the FCA has the power to designate a critical benchmark as an "Article 23A benchmark" where the FCA has given notice to the administrator under Article 21 or Article 22B that the benchmark does not accurately represent the market or economic reality it seeks to measure ("unrepresentative"), or its representativeness is at risk.
42. Section 1 of this Act applies to any reference to any index that is designated as an Article 23A benchmark, whether or not the use of the index is within the definition of use of a benchmark, as defined in Article 3(1)(7), or within the definition of a benchmark in Article 3(1)(3). It applies not only to supervised entities that use a benchmark, as defined in Article 3(1)(17) of the BMR, but includes use by non-supervised entities, that fall outside the scope of the BMR, subject to the contract or arrangement being governed by the law of England and Wales and laws of Scotland and Northern Ireland.
43. For the purposes of Section 1, "a contract or other arrangement" is defined as a contract or any legally binding arrangement between two or more parties. Given the wide usage of LIBOR, "other arrangement" is intended to capture legally binding arrangements which may not be contracts, including ancillary or subsidiary documents which reference LIBOR and are integral to the operation of the contract.
44. For the purposes of Section 2, a benchmark administrator is a natural or legal person that has control over the provision of a benchmark, as defined under Article 3(1)(6) of the BMR.

The Financial Services Act 2021

45. The FS Act 2021 introduced amendments to the BMR in order to provide for the orderly wind-down of critical benchmarks. Specifically, the amendments to the BMR grant new and enhanced powers to the FCA, providing an overarching legal framework which it can exercise to cater for a range of scenarios that could occur where a critical benchmark might become unrepresentative or cease.
46. This section of the explanatory notes sets out the key elements introduced in the FS Act 2021 to amend the BMR. A full commentary on those amended provisions is available in the explanatory notes to the FS Act 2021 2 (pp.62-68). The references to articles in this section of the explanatory notes should all be read as referring to articles of the BMR which were amended or introduced in the FS Act 2021.
47. The FS Act 2021 amended Article 21 of the BMR and introduced new provisions relating to the FCA’s powers to mandate the administrator of a critical benchmark to continue publishing the benchmark under certain conditions where the administrator gives notice of its intention to cease providing the benchmark. The maximum period for which the FCA may compel the administrator to continue publishing the benchmark was extended from 5 to 10 years. It also introduced provisions to require the FCA to conduct an assessment of the benchmark’s capability to represent the underlying market and economic reality it seeks to measure (its "representativeness"), where the FCA decides to mandate administration of a critical benchmark. The market or economic reality that the benchmark seeks to measure is set out in the benchmark statement, which the administrator of the benchmark must publish in accordance with Article 27 of the BMR.
48. The FS Act 2021 introduced Article 21A of the BMR which grants the FCA the power to prohibit some or all "new use" of a critical benchmark where the FCA has completed its assessment of the administrator’s plans to cease providing the benchmark under Article 21. Broadly, "new use" consists of creating new financial instruments or contracts that reference the benchmark after the prohibition; or using the benchmark in existing contracts, instruments or funds after the prohibition date where the contracts, instruments or funds did not reference the benchmark before the date of the prohibition. Article 29(1B) provides expressly that use of a designated benchmark by a supervised entity in breach of this prohibition does not affect either the validity or enforceability of a contract or other arrangement.
49. Articles 22A and 22B relate to the assessments of critical benchmarks conducted by the administrator and the FCA respectively. Article 22A requires the administrator of a critical benchmark based on contributions from supervised entities or supervised third country entities to conduct an assessment of the benchmark’s "representativeness" at least biennially, upon written notice from the FCA; and where a supervised contributor or a supervised third country contributor gives notice of its intention to cease contributing input data. Article 22B requires the FCA to conduct its own assessment of representativeness upon receipt of the administrator’s assessment under Article 22A and provide a written notice to the administrator setting out the outcome of its assessment.
50. The FS Act 2021 amended Article 23 of the BMR to introduce new requirements clarifying that a contributor who gives notice to cease contributing to a benchmark shall not cease that contribution until the end of its notice period (which is a minimum of 15 weeks), unless the FCA gives it written permission otherwise.
51. Article 23A introduced a power for the FCA to designate a critical benchmark under this Article where the FCA has given notice to the administrator under Article 21 or Article 22B that the benchmark is not able to accurately represent the market or economic reality it seeks to measure ("unrepresentative"), or that such representativeness is at risk. Under Article 23B, all use by supervised entities of an Article 23A benchmark is prohibited, except where the FCA makes exemptions under paragraph 2 of Article 23B or under Article 23C. Paragraph 2 of Article 23B allows the FCA to delay the date on which the prohibition under Article 23B comes into force by up to four months, beginning on the day on which the Article 23A designation takes effect. Article 23C grants the FCA the power to specify and permit certain "legacy use" by supervised entities of an Article 23A benchmark. Broadly, "legacy use" is where reference to the benchmark was included in a contract and instrument before the date the prohibition on new use of that benchmark comes into effect. "Legacy use" by supervised entities is prohibited except where the FCA has permitted use under Article 23C.
52. Article 23D of the BMR granted the FCA further specific new powers to provide for the orderly wind-down of a critical benchmark. Where the benchmark has been designated under Article 23A, the FCA may, by issuing a notice, require the administrator to change how a critical benchmark is determined, including in relation to the input data applied to the benchmark’s methodology and rules of the benchmark. Article 23G clarifies that the FCA will be able to apply the relevant powers to provide for the orderly wind-down of each "version" of a critical benchmark, where a benchmark is provided in different currencies, maturities and tenors.