The European Securities and Markets Authority (“ESMA”) has recently updated its Q&A on Regulation (EU) No. 2016/1011 of
8 June 2016 on indices used as benchmarks ("Benchmarks Regulation" or “BMR”).
One of the new questions considered by ESMA is whether or not the methodology of a benchmark can include factors that are not input data.
ESMA answered this question in the affirmative.
ESMA clarified its position, however, by explaining that such factors (i.e., factors that were not input data) should not measure the underlying market or economic reality that the benchmark intends to measure. Instead, ESMA reasoned, these factors should be elements that improve the reliability and representativeness of the benchmark. ESMA expounded on its rationale by explaining that the methodology of an equity benchmark could include a number of elements, together with the values of underlying shares, such as the free-float quotas, dividends, volatility of the underlying shares, etc. These factors, ESMA reasoned, are included in the methodology to adjust the formula in order to get a more precise quantification of the equity market that the benchmark intends to measure. ESMA cautioned, however, that such factors do not actually represent the price of the shares part of the equity benchmark.
To help distinguish between input data and factors that were not input data, ESMA noted that input data changes are taken into account by the methodology every time the value of the benchmark is to be updated, as they reflect the changes in the underlying economic reality measured by the benchmark. By contrast, ESMA noted, changing values of the factors are not taken into account in every computation of the benchmark, but only in instances pre-determined by the methodology.
Nevertheless, ESMA noted that factors that are not considered input data were still relevant elements of the methodology, and that, as such, it was important for such factors to comply with all of the requirements of Article 12 of the BMR, and that administrators were expected to use these factors in accordance with the pre-determined and BMR-compliant methodology.
The other question ESMA considered is whether or not the methodology of a regulated-data benchmark can include factors that are not covered by Article 3(1)(24) BMR.
ESMA answered this question in the affirmative.
Regulated-data benchmarks can only include input data that is covered by Article 3(1)(24) BMR.
However, the methodology of a regulated-data benchmark can still include factors that were not covered by Article 3(1)(24) BMR, but only if those factors were not considered input data (i.e., elements that improve the reliability and representativeness of the benchmark, as described above).
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