Why should U.S. financial services firms be interested in the new European Union performance benchmarking regulation? Joe Kavanagh, CFA and head of performance measurement and risk analysis at KBI Global Investors, has a few answers for you.
“A bunch of people out there are asking, ‘Why are we interested in this?’ ” Kavanagh says. “Well, it’s very clear actually. Many U.S. firms sell products into Europe. They have clients in Europe. They make publicly available their investment performance against benchmarks. If they do so, guess what? They are covered by this regulation. Period.”
Kavanagh spoke with FTF News during a break at FTF’s Performance Measurement Americas conference in last month. He was a panelist for the session, “Get Ready for the EU’s Benchmarks Regulation.”
As he explains in a recent Bull Run post, the new regulation covers administrators, contributors and users. “Benchmark administrators will have to go through an approval process over the next couple of years for their benchmarks with the European regulator. From 1 January 2020 the regulations become fully effective and investment firms from that date must not use unregulated benchmarks in the E.U.,” Kavanagh says.
“Within the interim two-year timeframe investment firms may continue to use these benchmarks in publicly available materials until they become aware that these benchmarks have not been approved,” Kavanagh adds. “The regulations require that investment firms now draw up an inventory of benchmarks they use, determine an alternative benchmark if the preferred benchmark is no longer available, either because they fail the approval process or are withdrawn from the market, and have robust written plans for cessation or material changes of a benchmark, and to reflect them in the contractual relationship with clients.”
There are punishments for non-compliance.
“The sanctions are varied. Certainly at the top end of the scale, it would bring a tear to your eye,” Kavanagh says. “The monetary fines go as high as 1 million euros, which is approximately $1.25 million, or 10 percent of the annual turnover [revenue] of the firm. … But what’s little known, perhaps, is that the U.S. firm that breaches this regulation may be a subsidiary firm … So, 10 percent of revenue is 10 percent of the parent company revenue and that is obviously quite a substantial sum of money.”
Kavanagh has managed the performance measurement department of KBI since 2000. KBI is an institutional investment management firm based in Dublin, Ireland.
CREDITS:
Video Production: Janene Knox and William J. Poznanski, Jr.
Interview conducted by: Eugene Grygo, chief content officer, FTF News
Co-Producers: Sarah Hathaway, vice president, Financial Technologies Forum (FTF) and Eugene Grygo
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