A benchmark is a reference value against which the performance of financial instruments may be measured. Benchmarks may be based on an index covering financial instruments of the same class, e.g. stocks or bonds. They can also be calculated for a specific industry, a type of company or as a reference value for the broader economy.
The integrity of benchmarks is critical to the pricing of many financial instruments, such as interest rate swaps, commercial and non-commercial contracts, loans and mortgages and risk management. Any risk of manipulation of benchmarks may undermine market confidence, cause significant losses to investors and distort the real economy. This is what the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmark Regulation) addresses.
The changes proposed by the European Commission to its market abuse and criminal sanctions proposals alone will not improve the way benchmarks are defined and used. EU regulation is necessary to improve the functioning and governance of benchmarks and to ensure that benchmarks which are defined and used in the EU are robust, reliable, representative and fit for purpose and that they are not subject to manipulation.
The Benchmark Regulation (Level 1) entered into force on 30 June 2016. Level 2 consultations are ongoing. The final application of the Regulation will take place on 1 January 2018.
Benchmark Regulation: the highlighted parts of the value chain are affected