EUROPE: Commission Delegated Regulation (EU) 2021/1352 of 6 May 2021

Thursday August 19 2021

The Commission Delegated Regulation (EU) 2021/1352 of 6 May 2021 was published in the Official Journal of the European Union on 13^th August 2021.

The Commission Delegated Regulation (EU) 2021/1352 of 6 May 2021 supplements Regulation (EU) 2016/1011 of the European Parliament and of the Council with regard to regulatory technical standards specifying the conditions to ensure that the methodology for determining a benchmark complies with the quality requirements.

For the methodology for determining a benchmark to be robust and reliable, that methodology should specify the nature of the input data used and any criteria to be applicable in circumstances in which the quantity or quality of input data falls below the standards necessary for the methodology to determine the benchmark accurately and reliably, it should be subject to an assessment of the relationship between the key assumptions used and the sensitivity of the benchmark computed by that methodology, it should be capable of representing the underlying market or economic reality that it seeks to measure and it should incorporate factors including parameters and input data that are most relevant to measure the underlying market.

A benchmark is calculated using a formula or other method of calculation based on underlying values. Administrators have a degree of discretion in constructing the formula, in performing the necessary calculation and in determining the input data. That degree of discretion creates a risk of manipulation. Administrators should therefore ensure that when such discretion is used, an appropriate control system is in place. Regulation (EU) 2016/1011 recognises that the construction of a benchmark methodology might embed discretion exercised by each administrator. It is important that the methodology includes clear rules identifying how and when that discretion is allowed to be exercised and in particular whether that discretion is based on an algorithm or pre-defined methodology. Furthermore, the methodology should clarify in which circumstances transaction data in the underlying market would be considered as not sufficient.

It is important that an administrator is able to construct a benchmark methodology that is resilient to different market conditions and that allows for the calculation of the benchmark in the widest set of possible market circumstances. The benchmark methodology used should therefore rely on adequate and appropriate historical values of the benchmark. For the same reason, and in particular to validate the calculation of the benchmark and to evaluate the performance of the methodology ex post, the benchmark methodology should be back-tested against available transaction data. Such back-testing should be an ex post exercise, which either uses additional available data that were not used for the calculation of the benchmark or other sources of transaction data, or reconstructs the historical values of the benchmark. To ensure that the benchmark methodology is capable of validation, it is important that back-testing is performed both at each annual review of the benchmark methodology and, depending on the type of the benchmark, either after each material change of that methodology, on an ongoing basis, or at the first provision of the benchmark. The findings from the back-testing should be reflected in the methodology.

A benchmark methodology that is resilient should be able to be used for the calculation of the benchmark in the widest set of possible circumstances, including in stressed market conditions. It is therefore important that administrators assess the impact of various market conditions on the methodology using historical data from realised stressed market conditions, and that for critical benchmarks, hypothetical data for unrealised stressed market conditions are used.

A benchmark methodology that is traceable and verifiable should allow for a continuous check and control of each calculation of the benchmark. Traceability should include the documentation of the different steps of the methodology and should be the basis for verifiability that would imply the ability to reconstruct the historical values of the benchmark.

In accordance with the principle of proportionality, administrators of non-significant benchmarks and of regulated-data benchmarks should not be subject to an excessive administrative burden. It is therefore appropriate that such administrators should be able to opt out from certain quality requirements for those benchmarks. In addition, where it is justified in view of the nature, scale and complexity of their activities, the likelihood of a conflict of interest arising between the provision of the benchmark and any other activities of the administrator, and the level of discretion involved in the process of provision of the benchmark, certain benchmark administrators should be able to opt out from certain requirements regarding the resilience of the methodology of the benchmark.

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