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Critical Benchmarks (References And Administrators’ Liability) Act 2021

Contents

Commentary on provisions of Act

Part 1: Critical Benchmarks

Section 1: References to Article 23A benchmarks

  1. Section 1 inserts Article 23FA and Article 23FB into the BMR. Article 23FA sets out how references to a benchmark that is designated as an Article 23A benchmark are to be treated in a contract or arrangement. Article 23FB makes further provision about references to Article 23A benchmarks.
  2. Paragraph 1 of Article 23FA clarifies that where the FCA designates a benchmark under Article 23A of the BMR, references to that benchmark in contracts and other arrangements should be treated as continuing to refer to that benchmark in the form it exists at any given time on or after it is an Article 23A designated benchmark. This also applies where the FCA has exercised a power under Article 23D(2) in respect of the Article 23A benchmark, and where the benchmark administrator has exercised a discretion or permission conferred upon it by the FCA under Article 23D of the BMR. This paragraph has the effect of ensuring that references to benchmarks in contracts or other arrangements include the benchmark once it has been designated under Article 23A, and the FCA has imposed changes to the methodology under Article 23D(2). For example, references to LIBOR in a contract will include synthetic LIBOR, following its designation under Article 23A.
  3. Paragraphs 2 and 3 of Article 23FA clarify how descriptions of a benchmark (as opposed to a reference that names a benchmark) are to be treated for the purpose of paragraph 1. Paragraph 2 provides that paragraph 1 applies to all references that include a description of the benchmark, including where the reference is treated as falling within the description of the benchmark immediately before its Article 23A designation, or was treated by the parties to the contract or arrangement as doing so. Paragraph 3 makes clear paragraph 1 also applies where the benchmark is described by reference to the market or economic reality which the benchmark sought to measure before its Article 23A designation.
  4. Paragraph 4 sets out that the provisions in paragraph 1 and 2 of this Article apply regardless of the date when the contract or arrangement that references the benchmark was formed, including those contracts formed before this Act becomes law. It also provides that the provisions apply to any reference to a benchmark, however expressed.
  5. Paragraph 5 provides that where a contract or arrangement references a benchmark before this Article comes into force, or before the benchmark is designated under Article 23A, the contract or arrangement is to be treated as having always provided that the reference to the benchmark would, once the benchmark became an Article 23A benchmark, have the meaning provided for in paragraph 1 (and where relevant paragraph 2 to ensure that the provision applies to a contractual definition of a benchmark that is wider than an express definition (such as LIBOR), to include a description of the benchmark). The parties are treated as having always agreed that the contract or arrangement should reference the benchmark, once designated, as it exists as an Article 23A benchmark, including changes to the benchmark imposed under Article 23D.
  6. Paragraph 6 provides that Article 23FA does not create any right, obligation or liability (i) in relation to any action, or inaction, of a person that was relevant to the creation of the contract or arrangement before the Article 23A designation, or (ii) to the operation of the contract before the Article 23A designation. Paragraph 7 provides that Article 23FA does not extinguish or affect any cause of action that existed before the Article 23A designation. These paragraphs make it clear that the effect of Article 23FA is not to create any new cause of action that did not exist prior to the Article 23A designation, and would not have existed had this legislation not been made, nor is it to extinguish any pre-existing cause of action.
  7. Paragraph 6 prevents the deeming provision in Article 23FA from creating new claims between the parties in relation to the formation or variation of a contract or arrangement prior to the designation of the benchmark, or its operation prior to the benchmark’s designation under Article 23A. For example, a party is prevented from arguing that the deemed effect of Article 23FA on a contract means that a new liability has been created in relation to representations made prior to a contract’s formation, which did not reflect the effect that Article 23FA would subsequently have on references to the benchmark. Instead, in such a case, those representations are to be considered according to the actual reality at the relevant time.
  8. However, paragraph 7 ensures that if a party has a valid cause of action that arose prior to the benchmark’s designation under Article 23A, it can be pursued – the deeming provision in Article 23FA does not extinguish or otherwise affect it. For example, a misrepresentation claim that could have been brought notwithstanding Article 23FA would not be extinguished. Again, this means that in such a case the relevant representations are to be considered according to the actual reality at the relevant time.
  9. The exception to this is that paragraph 7 also provides that the effect of Article 23FA on the contract or arrangement should be taken into account when determining the extent of a person’s loss or damage in respect of a cause of action which arose prior to the Article 23A designation. This means, for example, that where, as a result of Article 23FA(1), payments due under a contract have fallen to be calculated by reference to the benchmark in its Article 23A form, the calculation of loss or damages should take this into account.
  10. Paragraph 8 provides that the effect of Article 23FA is subject to Article 23FB (see paragraphs 69-74).
  11. Paragraph 9 makes clear that the provisions of Article 23FA and Article 23FB apply, even where the benchmark is not used in a contract or arrangement in line with the definition of "use" of a "benchmark" set out in Article 3 of the BMR (see paragraph 42). This means that these provisions apply to any contract or arrangement made under the laws of England and Wales, Scotland or Northern Ireland, regardless of whether it falls within the definitions set out in Article 3 of the BMR.
  12. Paragraph 10 sets out key definitions regarding the operation of Article 23FA and Article 23FB. An "arrangement" is any legally binding agreement between two or more parties, including where relevant financial instruments and securities. Paragraph 10(b)(ii) also makes clear that reference to "contract or other arrangement" includes any ancillary or subsidiary documents referred to in, or that form part of, the contract or arrangement in question.
  13. Paragraph 10(c) defines the term "Article 27 market or economic reality", for the purposes of paragraphs 1 and 3. It makes clear that this refers to the market or economic reality the benchmark represented before it was designated under Article 23A of the BMR by the FCA.
  14. Section 1 also inserts Article 23FB into the BMR. This clarifies how Article 23FA applies where a contract or arrangement includes fallback provisions, or other specific provision to operate in a different manner in response to a particular event or situation, and separately it provides a power for the Treasury to make limited provision in secondary legislation regarding the operation of Article 23FA.
  15. Paragraph 1 of Article 23FB sets out that paragraphs 1 and 2 of Article 23FA do not apply where a contract or arrangement makes express provision that those paragraphs do not apply.
  16. Paragraph 2 provides that paragraph 1 of Article 23FA does not apply where a contract or arrangement specifies that the reference to the benchmark does not include the benchmark as it exists when it is an Article 23A benchmark and/or when the FCA has exercised a power under Article 23D, imposing a synthetic methodology on the benchmark. This includes where paragraph 1 of Article 23FA would otherwise apply to the contract or arrangement by virtue of paragraph 2 of Article 23FA.
  17. Paragraphs 3 and 4 provide that the contractual continuity provisions in Article 23FA do not override the operation of contractual fallback provisions. "Fallback provision" is defined as an express provision that provides for a contract or arrangement to operate by reference to something other than the benchmark, to be varied so as to operate by reference to something other than the benchmark, or to terminate on a particular date or a particular circumstance. These paragraphs ensure that this legislation does not impede the operation of contractual fallback provisions on the date or in the circumstances specified in the contract or arrangement. Paragraph 4 provides three examples of circumstances which might be specified as "triggers" in fallback provisions – these examples, which are not exhaustive, are circumstances relating to the benchmark’s representativeness, its designation under Article 23A or the way in which it is determined.
  18. Paragraph 5 clarifies that, as a result of Article 23FA, a trigger in a contractual fallback provision that is activated by the cessation or unavailability of a benchmark, is not activated when a benchmark is designated under Article 23A or when its methodology is changed under Article 23D. This is consistent with the approach taken in the BMR (as amended by the FS Act 2021), which provides the FCA with the powers to ensure continued publication of an Article 23A benchmark, such that the benchmark does not cease to exist or to be available when it is designated under Article 23A or when its methodology is changed under Article 23D.
  19. Paragraph 6 provides that the Treasury can by regulations provide that Article 23FA does not apply to specified benchmarks or benchmarks of a specified description, or to specified contracts or other arrangements. It also provides that the Treasury can make provision by regulations specifying where express provision in a contract or arrangement would apply within the definition of "fallback provision" in paragraph 4 of Article 23FB, and for further cases, in addition to those described in paragraph 5, in which fallback provisions are not triggered.
  20. Paragraph 7 provides that the regulations can apply generally, or in specific cases, such as in relation to specific benchmarks, particular descriptions of contracts or arrangements, or particular types of fallback provision.

Section 2: Liability of administrator of an Article 23A benchmark

  1. Section 2 inserts Article 23FC into the BMR, which specifies actions or inactions for which the administrator of an Article 23A benchmark is not liable in damages.
  2. Paragraph 1(a) of Article 23FC provides that neither the administrator of an Article 23A benchmark, nor its officers or employees are liable in damages where it takes action or inaction that is required by the FCA under paragraph 2 or paragraph 8 of Article 23D of the BMR. Specifically, paragraph 2 of Article 23D provides that the FCA can impose requirements on the administrator of an Article 23A benchmark relating to how a critical benchmark is determined, including the use of input data, the rules of the benchmark or its code of conduct. Paragraph 8 of Article 23D clarifies that the benchmark administrator may not change any of these elements of the benchmark unless it is either required or permitted to do so by the FCA.
  3. Paragraph 1(b) also provides that the administrator of an Article 23A benchmark is not liable in damages where it then publishes the benchmark as amended as a result of the action or inaction required under paragraph 2 or by paragraph 8 of Article 23D. Paragraph (1)(b) applies regardless of whether the administrator has been compelled to publish the benchmark by the FCA under Article 21(3) of the BMR, and therefore includes a case where the administrator exercises discretion in continuing to publish the benchmark.
  4. Paragraph 2 sets out that to the extent that the administrator exercises a discretion conferred upon it by the FCA under paragraph 2 or paragraph 8(b) of Article 23D, the protections afforded to the administrator in paragraph 1 of Article 23FC will not remove liability. The administrator of an Article 23A benchmark remains liable for action it takes within the scope of its discretionary powers.
  5. Paragraph 3 also makes clear that paragraph 1(b) does not remove liability where the administrator exercises any other discretion relating to the time or manner of publication of the Article 23A benchmark.

Section 3: Consequential Provision

  1. Section 3 inserts a new paragraph 3 into Article 2 of the BMR which provides that neither paragraph 1 nor 2 of Article 2 limits the application of Articles 23FA to 23FC.
  2. It also amends Article 23G(3) of the BMR to include the new provisions inserted by this Act so that each version of an umbrella benchmark (a critical benchmark that is provided for different currencies, maturities or tenors, or a combination of these factors) is treated as a separate benchmark for the purpose of these provisions.

Section 4: Interpretation, extent and short title

  1. Section 4(1) defines "the Benchmarks Regulation" as 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. This is a reference to the BMR as it has effect in the UK following the UK’s exit from the EU and pursuant to the European Union (Withdrawal) Act 2018 (see section 20(3) of the Interpretation Act 1978).
  2. Section 4(2) provides that the Act extends to England and Wales, Scotland and Northern Ireland.
  3. Section 4(3) provides that the provisions of the Act come into force on the day on which it is passed.
  4. Section 4(4) provides that the Act may be cited as the Critical Benchmarks (References and Administrators’ Liability) Act 2021.

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