Can a Crypto Exchange become a Contributor under BMR?
As you may know, we have recently been registered by the French Financial Markets Authority as a Benchmarks Administrator under the 2016/1011 (EU) “Benchmarks” Regulation. We explained you in a previous article that it binds us to compliance obligations that ensure a certain level of legal security to our crypto indices subscribers. However, as seen of the current regulation meaning, providing “non-significant” (1) crypto reference rates and indices involves that some obligations do not apply to us. It is mostly (2) due to the fact that our benchmarks are not based on data collected on the API of “Input Data Contributors” in the strict sense of the BMR. Explanations on this “Unidentified Legal Object” of the index finance industry that the crypto exchange platforms are.
“Contributor” & “Supervised Contributor” under BMR
A contributor is “a natural or legal person contributing input data” (3) used for the benchmark calculation and administration — input data is basically “the data in respect of the value of one or more underlying assets, or prices, including estimated prices, quotes, committed quotes or other values” (4). In practice, a contributor can be any kind of operator providing financial and market data that can be used to determine a benchmark: a bank (5), an investment firm, a fund, etc. We can give you several examples, but what really defines a contributor is a triple-material criteria stated by BMR: contribution of input data means “providing any input data not readily available [first criterion] to an administrator, or to another person for the purposes of passing to an administrator, that is required in connection with the determination of a benchmark [second criterion], and is provided for that purpose [third criterion]” (6). BMR points the fact that the contribution of input data is qualified as it only if there’s a specific finality in the contribution (the contributor intends to provide input data that will be used for the determination of a benchmark) and if the input data is not easily accessible by the administrator or other third parties — in other words if the data is not “public”.
The main result of this qualification is that BMR bind the benchmark administrator to make a code of conduct “clearly specifying contributors’ responsibilities with respect to the contribution of input data and [to] ensure that such code of conduct complies with this Regulation [and that contributors adhere to this code]” (7). In extenso, this code of conduct forces the contributor to — among other things — be transparent in case of discretionary judgement in the input data providing, to report potentially suspicious input data, prevent conflict of interests, and implement record-keeping policies in case of control.
Code of conduct is not the only tool to mitigate risks. Next to the category of “common” contributors, BMR established a list of “supervised contributors” (8) which are bound to an additional layer of obligations, such as “a control framework that ensures the integrity, accuracy and reliability of input data and that input data is provided” (9), a “record-keeping of internal and external audits” (10), and the identification of the internal supervisors and senior personal (11).
Finally, BMR put a protecting framework onto the input data contribution activity to prevent risks of price distortion or market manipulation that the finance industry has already faced at some point. In the current state of the regulation, it seems this legal qualification does not apply to crypto exchange platforms.
To be a Contributor or not to be a Contributor: that is the (tricky) question
What has led us to this conclusion? Let’s proceed by elimination:
1) Is a crypto exchange platform a “Supervised Contributor”?
We first started with an initial observation: the exchanges we selected as input data sources for our benchmark calculation do not belong to the qualifications listed by the art. 3–1 17) of BMR. All of them are registered and regulated as “money transmitter” (12), neither as “an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU” nor “a market operator as defined in point (18) of Article 4(1)” as we assume they do not deal with “financial instruments” under the definition of the same Directive. As you may guess, money transmitter is not an activity pointed out by the BMR’s list.
2) Is a crypto exchange platform a “Contributor”?
That being said, we still had to check whether an exchange can be a “common” contributor. More precisely, whether the operator fulfills the triple-material criteria introduced above. The definition of the contribution under the art. 3–1 8) suggests the three criteria to be cumulative. Here’s the point: we assume the data we collect “is required in connection with the determination of a benchmark” (second criterion), but it is difficult to prove that an exchange provides us data for an index determination purpose (third criterion) as the input data we use to calculate and administer our benchmarks are readily available (contrary to the first criterion requirement). In other words, only one of the three criteria can be currently considered as fulfilled. Despite the hypothesis by which the provision of input data would be supervised within a specific agreement between the administrator and the contributor, crypto market data is made publicly available on the exchanges API due to two main reasons: first one, it’s in keeping with the crypto “open source” philosophy. Second one, it is a marketing necessity for the exchange to attract traders on their platform (and then prefer not to charge the access to data additionally to transaction fees).
Consequently, even though we collect “transaction data” (which is a particular category of input data (13)) on exchanges’ API, they cannot reasonably be considered as contributors under BMR provisions. As a result, we cannot pass through the regulation requirements nor substitute ourselves for the regulator authority — we mean that we cannot force exchanges to respect BMR obligations with a code of conduct as they are not under the scope of this regulation and, in extenso, under the regulator supervision.
Shall we consider this as a problem? Does the fact that crypto exchanges are not contributors may affect the robustness of a crypto index regarding market manipulation risks, for example? We don’t think so:
- Firstly, because European Union authorities soon plan to bind operators that provide virtual asset services in the European Union (such as exchanges) to implement a procedure and a system to detect and prevent market abuses (14) — which should dramatically reduce this kind of risk in the input data contribution.
- Secondly, because we think that building a “market-value-representative” benchmark (15) doesn’t mean that the index is economically exhaustive (16), but that the index should represent a significant market share of exchanges with a minimum of legal guarantees in the quality of transaction data that are provided — on this basis, this should imply for us to select our data sources through a specific procedure by which it verifies technical, market and legal criteria for each exchange (about the legal criteria: if the exchange is officially registered and if it respects AML compliance obligations for instance).
- Finally, because nothing is perfect, even regulation. In that case, contract might fill this (sometimes).
Data License Agreement = the “solution”?
Contrary to crypto exchanges, traditional exchanges used to charge the access to their transaction data (mostly because more and more companies flee from IPOs, and then the exchanges pivot to a more data-centric business (17)). This access is supervised by specific contracts so-called data licence agreements. In the traditional finance industry, exchanges charge operators with (excessive) fees — which SEC would like to regulate by the way (18) –. But data licence agreement could be an effective tool that can ensure a minimum set of guarantees. For instance, the exchange can be bind to an obligation of mean in “the minimum quantity of input data to be provided” or “the frequency of submission of the input data” that are necessary to the calculation of the benchmark (19) — out of consideration of the use of data for index purposes.
The question is: can crypto exchanges charge fee for the agreement that supervises the access to their API, just like the traditional ones do? If so, that would mean they shall charge the guarantees related to their API with regard to the purpose of the use of their data. That would also mean that they do not let these data publicly available (or only for the traders maybe? But that would also mean that they expressly charge the use of their data depending on the finality of the use — i.e. trader = free / index administrator = charged). Conclusion: they would take the risk to fall into the qualification of “Contributor” and be bound by the related obligations framework.
And you, do you think that the institutionalization of the crypto finance industry shall involve an agreement framework additionally to current — but partly inadequate — regulations?
Check crypto markets here —> https://koinju.io
(1) In a nutshell, a “non-significant benchmark” is a benchmark considered with a low systemic importance if the value of the funds, financial contracts or instruments using the benchmark for the cases describes under art. 3–1 3) BMR is worth under $50 billion.
(2) We invite you to check out our “Compliance Statement” here: https://koinju.io/benchmarks-index-and-rates . You’ll see that many provisions of BMR simply do not apply to us due to the nature of our Input Data sources.
(3) Cf. art. 3–1 9) BMR.
(4) Cf. art. 3–1 14) BMR.
(5) NB: Historically, BMR has been promulgated following the “LIBOR” scandal, which was an inter-banking reference rate based on data provided by several banks.
(6) Cf. art. 3–1 8) BMR. NB: IOSCO principles (incentive principles equivalent to BMR on an extra-EU scale) provide a similar definition of the contribution (or “submission”, according to IOSCO): “Prices, estimates, values, rates or other information that is provided by a Submitter [(= BMR’s “Contributor”)] to an Administrator for the purposes of determining a Benchmark. This excludes data sourced from Regulated Markets or Exchanges with mandatory post-trade transparency requirements” (cf. “Annex A — Glossary of Key Terms”). The last provision seems to comply with the “non-readily available” criterion stated by BMR.
(7) Cf. art. 15 BMR. NB: “The administrator shall be satisfied that contributors adhere to the code of conduct on a continuous basis and at least annually and in case of changes to it”.
(8) Cf. art. 3–1 17) BMR.
(9) Cf. art. 16–1 b) BMR.
(10) Cf. art. 16–1 e) BMR.
(11) Cf. art. 2 a) of the Commission delegated regulation (EU) 2018/1640 of 13 July 2018 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council with regard to regulatory technical standards specifying further the governance and control requirements for supervised contributors.
(12) See the qualification of Kraken (legal name, “Payward”) in the MSB register: https://www.fincen.gov/msb-registrant-search
(13) Cf. art. 3–1 15) BMR: transaction data “means observable prices, rates, indices or values representing transactions between unaffiliated counterparties in an active market subject to competitive supply and demand forces”. The data we collect are basically trades and order books and do refer to transactions indeed.
(14) See, for instance, art. 54–2 m) of the Proposal for a regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (COM/2020/593 final).
(15) The economic or market representativeness of a benchmark is one of the requirements of the BMR regulation (i.e., art. 11 provisions).
(16) Speaking of which, current accounting principles such as ASC 820 do not require to observe every market with exhaustivity to define the principal or most advantageous market by which the fair market value of an asset would be determined.
(17) See this article (in French): https://www.lemonde.fr/economie/article/2021/01/31/les-bourses-lancent-une-opa-sur-la-data_6068291_3234.html
(18) https://www.sec.gov/news/press-release/2020-311
(19) Cf. requirements of the art. 1 of the Commission delegated regulation (EU) 2018/1639 of 13 July 2018 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council with regard to regulatory technical standards specifying further the elements of the code of conduct to be developed by administrators of benchmarks that are based on input data from contributors.
