On 1 January 2018, the European Union introduced a new standard for developing benchmarks, which has its legal basis in Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (hereinafter: ‘BMR’).  

The main idea behind the efforts of EU authorities in that respect was to raise the level of consumer protection. That goal is to be achieved mainly with the requirements concerning the benchmark determination methodology and the exercise of supervision of a new group of entities represented by benchmark administrators.

The provisions of BMR stipulate that benchmarks must be developed using a methodology that is transparent and resistant to manipulation. To that end, BMR requires that benchmarks be determined according to the actual transactions in a given market and that they measure the economic reality as accurately and credibly as possible.

The UKNF (hereinafter: ‘supervisor’) emphasises that one of the main features of the benchmark determination methodology should be its flexibility, as the economic environment of financial markets is subject to constant changes.

That is why benchmark determination methodology must easily adapt to the changing reality. That is to ensure that benchmarks will always be resistant to manipulation by being constantly related to the active area of the financial market. In the light of BMR, it is essential that any benchmark, which so far has measured a market that sometimes faces liquidity shortages, should evolve in terms of its calculation methodology. The BMR provides that the administrator should review the benchmark determination methodology at least every two years.
In the opinion of the UKNF, that may improve the quality and transparency of the benchmarks used by supervised entities. In this context it should be emphasised that since each benchmark should be inherently characterised by its evolving nature, there cannot be any disruption to its continuity.

The UKNF also points out that under BMR any entity which intends to operate as benchmark administrator should apply to the competent authority, within an appropriate time limit, for authorisation or registration. However, benchmark providers benefit from a transitional period until 1 January 2020 and as regards critical benchmarks an EU-level decision has been made to extend the period for another two years, i.e. by 31 December 2021. The transitional period allows benchmark providers to undertake the necessary work to adapt their methodology to the requirements under BMR and to submit an appropriate request to the competent authority. As part of the authorisation or registration procedure and then day-to-day supervision, a competent authority assesses, among other things, the administrator’s policies on internal control and prevention of conflicts of interests as well as the methodology and transparency of the entire benchmark determination process.

In the UKNF’s view, the above-mentioned requirements of BMR—concerning the evolution of the methodology and the necessary public supervision of benchmark administrators—represent very important elements of protection of non-professional parties of economic contracts.
Consumers should be informed in a transparent manner about the reference to a benchmark in credit agreements. The relevant provisions are contained in the Directive 2014/17/EU of the European Parliament and of the Council on credit agreements for consumer relating to residential immovable property and Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers. According to those provisions, a creditor must provide the consumer with information about the name of the benchmark and its administrator. Defining and describing a benchmark are the tasks of the administrator.

WIBOR has been a critical benchmark as of the effective date of Commission Implementing Regulation (EU) 2019/482 of 22 March 2019. As regards the development of the benchmark, the UKNF would like to stress that in the light of the BMR, the UKNF does not diagnose the risk to the continued viability of that rate. In the UKNF’s view, gradual and evolutionary adaptation of its determination methodology to better reflect the real economic conditions through that benchmark is not a material change of that methodology. The supervisor points out that other benchmarks used in the EU, such as LIBOR or EURIBOR, have also been, or are being, modified towards a methodology which reflects more accurately the costs of banks’ wholesale funding. The changes made in international markets are seen by benchmark administrators and competent authorities as constituents of benchmark development which do not disrupt their determination process.

The UKNF stresses that what the supervisor expects is the adaptation of the rules of setting the benchmarks existing in the Polish financial market to the requirements of BMR. Since WIBOR is entered on the list of critical benchmarks, in particular due to the scale of its use in mortgage loans granted to consumers, the UKNF reiterates its expectation that the provider of that benchmark should apply, in accordance with BMR, for authorisation to operate as administrator, by the end of 2019.

The supervisor considers that obtaining authorisation to operate as benchmark administrator, though necessary, must not be understood as completion of the process of modification of the determination methodology for a specific benchmark. Pursuant to BMR, such changes must be continued and the concern for financial stability and certainty of business transactions require a gradual and evolutionary approach to such process. To that end, the UKNF expects further improvement of the development methodology for the interest rate benchmark so that it is easily adaptable to the changing economic reality.