Financial benchmarks
On 3 February 2021, the Althing passed Act no. 7/2021 on financial benchmarks. With this Act, Regulation (EU) no. 2016/2011 of the European Parliament and of the Council of 8 June 2016, hereinafter BMR (Benchmark Regulation), with amendments pursuant to Regulation (EU) no. 2019/2089 of the European Parliament and of the Council of 27 November 2019, were implemented in Iceland. Pursuant to Article 13(1) of the Act, the Minister has issued Regulation no. 162/2021 on financial benchmarks, in addition to which the Central Bank of Iceland has, in accordance with Article 13(2) of the Act, set Regulation no. 752/2021 on financial benchmarks.
The regulation applies to both the preparation of benchmarks, including the processing of input data on which they are based, and their use. "Benchmarks" broadly refer to figures that are accessible to the public, are determined at regular intervals on the basis of certain values, and are used to determine payments, the value of financial instruments or the asset allocation of investment funds. Certain specified entities are exempt from the regulation, including central banks and entities that compile benchmarks for public policy purposes.
Different classes and types of benchmarks
Critical benchmarks are defined in Article 20 of the BMR, but this category includes benchmarks that meet certain size or importance criteria. Regarding size limits, the indices that are used directly or indirectly in the composition of the benchmarks are covered under Paragraph 1(a) of Article 20 of the BMR, if they are used as a reference for financial instruments, financial contracts or to measure the performance of investment funds, if they have a value of at least EUR 500 billion.
Significant benchmarks are defined in Article 24 of the BMR, but this class includes benchmarks that do not meet the size or importance criteria prescribed in Article 20 for critical benchmarks, but still meet the same criteria set out in Article 24 of the BMR. Regarding size limits, the indices that are used directly or indirectly in the composition of the benchmarks are covered under Paragraph 1(a) of Article 24 of the BMR, if they are used as a reference for financial instruments, financial contracts or to measure the performance of investment funds, if they have a value of at least EUR 50 billion (but no more than EUR 500 billion, cf. the requirements of Article 20 of the BMR).
Non-significant benchmarks are those benchmarks that are not considered critical benchmarks, cf. Article 20 of the BMR, nor significant benchmarks, cf. Article 24 of the BMR.
Investment Fund
The Financial Supervisory Authority of the Central Bank of Iceland draws special attention to the fact that the use of the term investment fund in the BMR differs from its use in other legislation in the financial market. According to the BMR, an investment fund is defined as follows: an alternative investment fund as defined in point a of Article 4(1) of Directive 2011/61/EU, or a UCITS as defined in Article 1(2) of Directive 2009/65/EC.
As a result, the term investment fund in the BMR refers to both alternative investment funds and UCITS.
Operating license or registration
The Financial Supervisory Authority points out in particular that entities that intend to have control over the provision of a benchmark must apply for an operating license to do so or, as the case may be, notify the Financial Supervisory Authority when determining the benchmark, in accordance with Article 34 of the BMR.
The general rule, which is set out in point a of Article 34(1) of the BMR, is that parties must apply for an authorisation to be the administrator of the provided benchmarks within the meaning of this Regulation. There are two exceptions to this principle: stipulated on one hand in point b of Article 34(1), which states that it is possible for regulated entities to register as an administrator provided certain conditions are met and, on the other hand, in point c of Article 34(1) which states that a party can register if the indices it intends to provide would qualify as a non-significant benchmarks.
Supervised entities means any of the entities listed in points a to m under item 17 of Article 3(1) of the BMR.
Use of the benchmarks
The use of a benchmark refers to one of the items listed in point 7 of Article 3(1) of the BMR. This includes i.a. measuring the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio, or of calculating performance-linked fees.
Parties that are subject to the scope of the BMR and use benchmarks according to the Regulation are encouraged to familiarise themselves with the content of the Regulation and in particular Title V on the use of benchmarks.
Further information
Queries can be emailed to BMR@sedlabanki.is or by phoning: +354 569-9600. Parties that are subject to the scope of Act no. 7/2021 on financial benchmarks are encouraged to familiarise themselves with the content of the Act and, as the case may be, implement the obligations stipulated in the Act in their operations, apply for an operating license or register with the Financial Supervisory Authority.