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Benchmarks Regulation – ESMA update on what it means to be a “user”

Benchmarks Regulation – ESMA update on what it means to be a “user”
  • United Kingdom
  • Financial institutions - Asset managers and funds


There has been much discussion on what it means to “use” a benchmark for the purposes of the EU’s Benchmark Regulation (“BMR”). As the BMR has been effective since 1 January 2018, it is imperative that fund managers know whether or not they are caught.

On 5 February, ESMA updated its Q&As to provide more information on what types of investment funds are considered to be using an index for the purposes of (1) tracking the return of an index, (2) defining the asset allocation of a portfolio and (3) measuring performance.

The ESMA response in particular on the definition of asset allocation is likely to have a wider impact on users of benchmarks than had previously been hoped.

1. Tracking an index

ESMA have clarified that the BMR will capture:

• investment funds where the strategy of the funds is to replicate or track the performance of an index or indices through synthetic or physical replication; and

• structured investments funds that provide investors with algorithm-based payoffs linked to the performance, or the realisation of price changes or other conditions, of indices.


As we would expect, given the current rules we have in the UK around the disclosures for tracker funds, the investment funds caught under this limb of the BMR have been easier to identify and the updated ESMA response serves to confirm current thinking.

2. Defining the asset allocation of a portfolio

Of more interest in the UK has been the interpretation of using an index with “the purpose of defining the asset allocation” of a fund. Until now, no guidance has been given as to what this means in practice and we have seen fairly robust interpretations being taken.

However, the updated ESMA Q&A clarifies that an investment fund will be using an index to define its asset allocation when the fund’s documentation and, in particular, its investment policy or strategy, “define constraints on the asset allocation”. By way of example, ESMA suggest this could be where the investment policy or strategy require the fund to invest a percentage or the whole portfolio in securities that are constituents of an index.

Further, ESMA have clarified that this could include actively managed funds where the manager has discretion over the actual composition of the portfolio, subject to the investment objective.


This has a more wide-reaching impact on UK funds than had previously been thought and is likely to impact many of our clients.

This will, in our view, also tie into the FCA’s current work on identifying where and how investment funds use benchmarks and how these are disclosed. On the face of many fund policies, it will not be clear that there is a constraint to investment in a particular index – especially where this impacts only a percentage of the portfolio or where it defines a wide universe.

Fund managers will need to consider their investment policies and strategies and take a purposive approach to the BMR. This means that:

• if in reality the fund is constrained to an index, even if not yet set out in the investment policy or strategy, the relevant BMR disclosures should be made as soon as possible;

• when new funds are being drafted or existing funds are being reviewed, changes may need to be made to the policies or strategies of those funds to clearly reflect their index constraints; and

• clients should ensure they have the required robust written plan in place setting out actions they would take if a benchmark materially changes or ceases to be provided.

3. Using an index to measure performance

ESMA have confirmed the view that has been accepted in the industry that use of a benchmark only for the purposes of performance comparison is not “use” of a benchmark under the BMR.


As this confirms current thinking, there should be limited impact on clients.

However, we would suggest that where benchmarks are referenced in documentation, and in particular in investment policies or strategies, fund managers are very clear where those indices are being used only as a performance comparator. Again, this links into the FCA’s current work on benchmarks.

How can Eversheds Sutherland help you?

We have been heavily involved in advising clients on the impact of the BMR and on the FCA’s current work on benchmarks. We routinely advise on the drafting and interpretation of investment policies and strategies.

We can assist you in considering what your funds actually do, the impact that this will have on your policies and disclosures, and whether you will then be caught by the wider impact of the BMR.

Our Consulting team can also assist with the provision of a robust written plan.

We would be happy to discuss how we can help.

Previous ebriefings

Our previous ebriefing on the BMR can be found here.