Benchmarks and the Law: Why Indices Have Their Own Rulebook

In our recent article on indices, we called them the quiet heroes of finance – the numbers that quietly decide whether your portfolio is soaring or sulking. But when an index graduates to “benchmark” status, things get serious. What looks like a harmless figure on Bloomberg suddenly comes with lawyers, regulators and compliance officers all pulling up chairs.

Benchmarks are the plumbing of modern finance. The FTSE 100, the S&P 500, SONIA, SOFR, even commodity reference prices – all of them are used to price securities, calculate loan payments and measure fund performance. Trillions of pounds hang on them. And because “trillions” is the kind of number that makes regulators spill their tea, benchmarks now come with a legal rulebook of their own.

When Indices Grow Teeth

Under the UK Benchmarks Regulation (carried over from EU law after Brexit), a benchmark is basically any index that’s used to set the value of a financial deal – whether that’s a loan, a derivative, or how a fund’s performance is measured. The net is cast wide on purpose: everything from share indices like the FTSE 100 to interest rates such as SONIA gets caught.

Why does this matter? Because the moment you put an index into a contract with real money attached, it stops being a background number and becomes a legally regulated benchmark. Drop it into a loan agreement or swap and suddenly it’s on the FCA’s radar – and your compliance team is reaching for the paracetamol.

The Benchmarks Rulebook

The EU rolled out the Benchmarks Regulation (BMR) in 2018, and the UK dutifully tucked it into domestic law after Brexit. The logic was simple: if benchmarks are holding up global finance, someone had better check they don’t wobble.

The BMR rests on three main characters:

• Administrators – the people running the benchmark. They must be authorised, publish how it’s calculated, and keep plan B handy in case the whole thing suddenly disappears.
• Contributors – usually banks feeding in data. The job description: give honest numbers, not creative writing.
• Users – banks, brokers, fund managers – can only touch benchmarks that appear on the FCA or ESMA registers. Off-list is off-limits.

In other words, what was once a gentleman’s agreement is now a full-blown rulebook – clipboards, oversight, and regulators peering over shoulders included.

Critical, Significant… or Just a Bit Niche

Not every benchmark carries the same weight. Some are so central that if they vanished, markets would wobble. Others are important, but their absence wouldn’t cause global panic. And then there are the niche ones – handy in their own corner of the market, but unlikely to keep bankers awake at night.

The BMR sorts them into three tiers:

• Critical benchmarks are the giants. They underpin contracts worth at least €500 billion, or they’re so vital that if they stopped being published, the system would creak badly. LIBOR and EURIBOR both made the list. With this status comes extra homework: strict governance, mandatory fallbacks, and regulators who can make sure the show goes on, even if the original provider heads for the exit.
• Significant benchmarks sit in the middle. Widely used, yes. System-breaking if they disappeared, no. They still need proper authorisation and oversight, but without quite the same level of fuss.
• Non-significant benchmarks are the rest. They’re still regulated, but with a lighter touch – more “keep an eye on things” than “wrap it in cotton wool.”

The idea is simple: throw the full rulebook at the benchmarks that matter most and ease off where the risks are smaller.

Benchmarks Without Borders

Benchmarks don’t respect borders. A rate published in London can end up embedded into contracts in New York, Singapore or Dubai. That’s great for global finance – until you realise that without consistent rules, the same number could mean different things depending on where you’re standing. Cue chaos.

The IOSCO Principles published back in 2013, set the global standards for how benchmarks should be calculated, run and overseen. They’ve become the benchmark for benchmarks, and the UK and EU Regulations were written with them firmly in mind.

The US takes a slightly different tack – less box-ticking, more case-by-case. The SEC and CFTC keep watch, while the Alternative Reference Rates Committee (ARRC) took on the unenviable task of herding the market away from USD LIBOR and towards SOFR. Herding cats looks easy by comparison.

In Asia-Pacific, regulators in Singapore, Hong Kong and Japan have worked IOSCO standards into their own rulebooks, proving that benchmark law really is one of the few exports everyone wants to copy.

For cross-border deals, the UK and EU apply an equivalence test: a foreign benchmark can only be used if its home rules are close enough to theirs. In other words, play by broadly the same rules or take your index elsewhere.

The message is clear: Benchmarks may zip around the globe, but regulation is always chasing after them, clipboard in hand.

LIBOR: How Not to Run a Benchmark

The LIBOR saga remains the benchmark cautionary tale. For years it was the world’s go-to reference rate, quietly anchoring everything from mortgages to trillion-dollar derivatives. Then came the scandals: traders nudging the numbers to suit their own books, regulators catching on, and billions in fines that left LIBOR’s reputation in tatters.

By the end of 2021, LIBOR was officially retired. But there was a snag: millions of contracts still depended on it and couldn’t be rewritten overnight. To prevent legal chaos, the FCA ordered the administrator to publish a “synthetic” LIBOR – a formula using risk-free rates such as SONIA plus a fixed adjustment to mimic the old figures. It wasn’t a comeback; more like a cardboard cut-out, only there so that legacy contracts had something to lean on. And it was strictly off-limits for new business.

The trouble was what happened in between. Countless contracts pointed to LIBOR but didn’t say what should happen if it disappeared. That meant frantic contract amendments, sleepless nights in Canary Wharf, and lawyers debating whether courts should imply a fallback or declare the deal frustrated.

The BMR has since tried to stop history repeating itself: administrators must now publish robust fallback provisions, and supervised entities must include them in their contracts. It’s the legal equivalent of keeping a spare tyre in the boot – tedious until the moment you need it, at which point it saves the whole journey.

Who Owns the Numbers?

Here’s the thing about benchmarks: those tidy figures like the FTSE 100 or the S&P 500 look like public information, but they’re not. They’re more like premium content. Index providers – FTSE Russell, MSCI, S&P Dow Jones – own the rights, and if you want to use their numbers in a product, you’ll need to buy a licence. Spoiler: it doesn’t come cheap.

This isn’t some side hustle either. Selling access to benchmarks is big business. The providers aren’t just publishing numbers; they’re running a lucrative subscription service where the password is L-I-C-E-N-C-E.

Try to sneak an index into a fund or note without paying, and you won’t just get a polite email – you’ll get lawyers at the door faster than you can say “unauthorised use.”

So, the takeaway? Benchmarks may look like free public goods, but they’re really proprietary products with a price tag attached. In finance, even the numbers come with an invoice.

Benchmarks in the Real World

So, what does all this mean if you’re actually using benchmarks? In short: you can’t treat them like background wallpaper. They’re more like structural foundations – essential, but you really want to know they’re solid.

First, check the guest list: only benchmarks on the FCA or ESMA register are allowed into your contracts. Invite an unauthorised one in and expect regulatory side-eye.

Second, always have a backup plan. If your chosen benchmark disappears (remember LIBOR’s dramatic exit?), your contract needs a fallback. Otherwise, you’re left arguing in court while payments grind to a halt.

And finally, don’t forget the entry fee. Many benchmarks are proprietary and using them without a licence is like sneaking into a concert without a ticket – sooner or later security (cough* lawyers) will find you.

The risks of getting this wrong? Fines, lawsuits, contracts that don’t work, and compliance officers muttering your name under their breath. Get it right, though, and benchmarks do exactly what they’re supposed to: keep the financial system running smoothly, without becoming the main story.

The Last Word

Benchmarks are funny things. On the surface they’re just numbers, yet whole markets lean on them like scaffolding. Handle them well and they quietly keep the system upright. Handle them badly and they can topple contracts, trigger scandals, and unleash lawyers at your door with a fallback clause.

They may be dull to look at, but benchmarks aren’t dull in practice – they’re the numbers that make finance work, and the ones you definitely don’t want to ignore.