EC Proposes to Amend Rules for Financial Benchmarks

The proposed amendments related to orderly cessation of a financial benchmark are designed to reduce legal uncertainty and risks to financial stability. There are three main pillars to the proposed amendments of the Benchmarks Regulation provisions governing the winding down of a benchmark with systemic relevance in EU. First, the proposed Benchmarks Regulation amendments will introduce a statutory power, whereby EC designates a replacement rate if and when a benchmark whose cessation would result in significant disruption in the functioning of financial markets in the Union ceases to be published. The replacement of all references to the “benchmark in cessation” with a statutory replacement rate is designed to avoid, or at least minimize, costly litigation by providing legal certainty for all contracts involving an EU supervised entity. Second, the statutory replacement rate will, by operation of the law, replace all references to the “benchmark in cessation” in all contracts entered into by an EU supervised entity. Third, for contracts not involving an EU supervised entity, member state are encouraged to adopt national statutory replacement rates. 

The proposed amendments related to specific foreign-exchange benchmarks aim to exempt specified third country spot foreign-exchange benchmarks from the scope of the Benchmarks Regulation where they fulfill certain criteria. The list of exemptions set out in Article 2 of the Benchmarks Regulation would be extended to include spot foreign-exchange benchmarks designated by EC. This would be accompanied by a provision specifying how EC may exercise its power and the criteria for exempting qualifying spot foreign exchange benchmarks from the scope of the Benchmarks Regulation. For the spot foreign-exchange benchmark to qualify for exemption, it has to measure the spot exchange rate of a third-country currency that is not freely convertible and it has to be used by EU supervised entities on a frequent, systematic, and regular basis as settlement rate to calculate the payout under a currency forward or swap contract. Furthermore, to enable EC to have all the necessary elements to designate exempted benchmarks, ESMA and ECB are required to provide it with relevant information and views on specific exemption criteria. Finally, to monitor appropriateness of the newly introduced exemption, competent authorities and supervised entities are required to periodically report to EC on the use of the exempted benchmarks by EU businesses and the changes of the balance sheets of supervised entities in terms of exposure to third country currency fluctuation.

EC proposes to establish a monitoring program to evaluate whether proposed amendments deliver the intended results. This legislative proposal requires competent authorities of supervised entities using the replaced benchmark to monitor whether the replacement has minimized contract frustration or any other detrimental effects on economic growth and investments in EU. They shall report this to EC and to ESMA annually. This legislative proposal requires competent authorities of supervised entities that use third-country foreign-exchange benchmarks that are designated by EC as excluded from the scope of the Benchmarks Regulation to report to EC and ESMA on the number of derivative contracts that use that foreign-exchange benchmark for hedging against third-country currency volatility at least every two years.

Related Link: Proposal and Related Documents

Keywords: Europe, EU, Banking, Securities, Benchmark Regulation, Financial Benchmarks, Interest Rate Benchmarks, Foreign Exchange Benchmarks, IBOR, ESMA, EC