Background

This briefing outlines the obligations of UCITS management companies and AIFMs for funds they manage that “use” a benchmark within the EU under the amended Benchmarks Regulation (Regulation (EU) 2016/1011) (the “Amended Regulation”). The Amended Regulation will apply from 1 January 2026.

The Benchmarks Regulation currently restricts the use by UCITS management companies and AIFMs (“fund management companies”) of benchmarks in the EU to benchmarks that are provided by administrators that are approved by European Securities and Markets Authority (“ESMA”). A transitional exemption currently allows the continued use of benchmarks provided by non-EU administrators until the expiry of the exemption on 31 December 2025.

The Amended Regulation aims to reduce the regulatory burden for users of non-significant benchmarks, by limiting the scope of the Amended Regulation to “critical” or “significant” benchmarks and certain climate-related and commodity benchmarks.

Does your fund “use” a benchmark in scope of the Benchmarks Regulation?

An investment fund is subject to the Amended Regulation where it “uses” an index (or a combination of indices) as a benchmark in one of the following ways:

1. the fund tracks the return of such index;
2. the asset allocation of the fund’s portfolio is determined by the index;
3. performance fees payable by the fund are computed by reference to the index; or
4. the fund has entered into a derivative contract that gives exposure to the index.

From 1 January 2026, the use by investment funds of non-significant benchmarks will essentially fall out of scope of the Amended Regulation, with the following categories of benchmarks remaining in scope (“in-scope benchmarks”).

Critical Benchmarks

A benchmark is “critical” where it is:

• used within the EU as a reference for financial instruments / financial contracts / investment funds having a total value of at least EUR 500 billion;
• recognised as a critical benchmark in an EU member state using a procedure prescribed in the Amended Regulation. The procedure provides that if an EU member state regulator deems a benchmark critical, it must notify ESMA. This notification includes an assessment that evaluates the potential adverse impact of the benchmark’s cessation or unreliable provision on market integrity, financial stability, consumers, the real economy, or household and business financing. ESMA reviews the assessment within six weeks and forwards its opinion to the European Commission, who may adopt an implementing act to include the benchmark in its list of critical benchmarks; or
• used by financial instruments / financial contracts / investment funds having a total value of at least EUR 400 billion, where ESMA considers that the benchmark has no or very few appropriate substitutes and it would have a significant and adverse impact on the market if it were to cease to be provided or be reliable.
  

Significant Benchmarks

A benchmark is “significant” where it is:

• used by financial instruments / financial contracts / investment funds having a total value of at least EUR 50 billion; or
• recognised as a significant benchmark in an EU member state using a prescribed procedure in the Amended Regulation, either by the benchmark administrator opting to have its benchmark considered as significant, or by an EU member state regulator or ESMA directing that the benchmark be classified as significant on the basis that there are very few appropriate substitutes and/or there being a significant and adverse impact on the market if the index were to cease to be provided or be reliable.

EU Climate Transition Benchmarks

A benchmark is an EU climate transition benchmark where it:

• is labelled by its benchmark administrator as an “EU climate transition benchmark” whose underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on a “decarbonisation trajectory” per the Paris Agreement adopted under the United Nations Framework Convention on Climate Change (the “Paris Agreement”);
• complies with any minimum standards laid down by the European Commission that specify criteria for asset selection and exclusion, asset weighting methods, and decarbonisation trajectories; and
• includes “CTB” in its name.

EU Paris-Aligned Benchmarks

A benchmark is an EU Paris-aligned benchmark where it:

• is labelled by its benchmark administrator as an EU Paris-aligned benchmark whose selection of underlying assets mean that the resulting portfolio’s carbon emissions are aligned with the Paris Agreement;
• complies with any minimum standards laid down by the European Commission that specify criteria for asset selection and exclusion, asset weighting methods, and decarbonisation trajectories, and whose activities do not significantly harm other environmental, social and governance objectives; and
• includes “PAB” in its name.

Commodity benchmarks subject to Annex II

Funds will not be able to use certain types of commodity indices that are subject to Annex II of the Amended Regulation (“Annex II commodity indices”). The Amended Regulation excludes from its scope commodity benchmarks based on submissions from contributors the majority of which are non-supervised entities and in respect of which the total average notional value of financial instruments referencing the benchmark does not exceed EUR 200 million over a period of 12 months.

In addition to non-significant benchmarks, other specific benchmarks that are now out of scope include non-EU spot foreign exchange benchmarks as long as they: (a) reference a spot exchange rate of a non-EU country to which currency controls apply; and (b) the spot foreign exchange benchmark is used on a frequent, systematic and regular basis to hedge against foreign exchange rate movements, or there is no equivalent alternative benchmark provided by an administrator in the EU.

What do fund management companies need to do?

Review of existing / future use of benchmarks

From 1 January 2026 onwards, fund management companies are required to regularly check the public register maintained by ESMA (the “ESMA Register”) (or the European Single Access Point, when available) to verify the regulatory status of administrators for any benchmarks they plan to use.

In addition, the follow steps should be taken by fund management companies in good time ahead of the 1 January 2026 effective date:

1. identify any benchmarks that their funds use (e.g., where a fund’s strategy is to track an index or where a fund invests in index-related derivatives);
2. confirm whether any relevant benchmark is an “in-scope benchmark” as described above; and
3. if the benchmark is determined to be an in-scope benchmark, confirm whether the administrator / benchmark is officially approved for use by checking the ESMA Register.

New references to a “significant benchmark” may not be added by a fund management company where that benchmark is the subject of a public notice issued by an EU member state regulator or ESMA to the effect that the benchmark does not comply with the Amended Regulation, and that users are to refrain from using that benchmark (a “warning notice”).  A fund management company that uses a benchmark that is subject to a warning notice in existing financial contracts or financial instruments shall be required to replace that benchmark with an appropriate alternative within 6 months of the publication of that warning notice, or issue and publish a statement on the fund management company’s website providing clients with a reasoned explanation for not being able to do so.

New references to an in-scope benchmark may not be added by a fund management company where the administrator of that benchmark is not included in the ESMA register.

What is meant in practice by “adding a new reference” will depend on how the relevant fund management company uses benchmarks. For example, it could include where a fund:

1. starts to track the return of a new index;
2. determine its asset allocation by reference to a new index;
3. compute its performance fees by reference to a new index; or
4. enters into a derivative contract that gives exposure to the index.

Prospectus disclosure

Where a prospectus published under the EU Prospectus Regulation or the UCITS Directive relates to instruments that reference an in-scope benchmark, the prospectus must include clear and prominent disclosure in the prospectus stating whether the benchmark is provided by an administrator that is included on the ESMA Register. If the instruments reference an in-scope benchmark which is the subject of a warning notice, the prospectus must also include, without undue delay following the publication of the warning notice, that information in a clear and prominent manner. Accordingly, following the review referred to above, fund management companies should determine whether any updates are required to prospectus disclosures for their funds under management.

Contingency plans

Fund management companies must continue to adhere to the requirement to maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided. Where feasible and appropriate, such plans must designate alternative benchmark(s), indicating the reasons for the suitability of such alternative benchmarks. Fund management companies shall, upon request and without undue delay, provide the relevant member state regulator with those plans and any updates and shall reflect them in fallback provisions applicable to financial contracts, financial instruments and investment funds.

For more information and advice, please contact any member of our Asset Management and Investment Funds Group.