International regulatory best practice places a duty on the administrator of a benchmark to have procedures in place for the potential need for its evolution. The Principles for Financial Benchmarks published by the International Organization of Securities Commissions (IOSCO) recommend benchmark administrators regularly review conditions in the benchmark’s underlying market in order to determine whether changes to the design of the benchmark methodology might be necessary. The EU Regulation 2016/1011 on indices used as benchmarks also addresses this issue throughout the text.
In light of these requirements, the European Money Markets Institute (EMMI) proposed to distinguish between the underlying interest of a benchmark, which defines the market or economic reality that the index seeks to measure; and the statement of the index’s determination methodology, which describes how the underlying interest is to be measured. Combined, these are considered to be the benchmark specification.
All respondents provided feedback that EMMI’s proposed structure for the new repo index’s specification was appropriate. Respondents agreed that the distinction between the economic reality the index intends to measure, which constitutes the durable component of the specification, and the means to measure such reality, has the potential of minimizing risks, in case an evolution of the index is deemed necessary.