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    EU Amends Benchmarks Regulation to Address Benchmark Cessation

    February 12, 2021

    EU published Regulation 2021/168, which amends the Benchmarks Regulation (2016/1011) with respect to the exemption of certain third-country spot foreign exchange benchmarks and the designation of replacements for certain benchmarks in cessation. The amendments have been made against the background of an expected phasing-out of the London Inter-Bank Offered Rate (LIBOR) by the end of 2021. The new rules are intended to reduce legal uncertainty and avoid risks to financial stability by making sure that a statutory replacement rate can be put in place by the time a systemically important benchmark is no longer in use. Regulation 2021/168 shall enter into force and apply from the day following that of its publication in the Official Journal of the European Union.

    European Council had adopted these amendments on February 02, 2021. Regulation 2021/168 highlights that, to enable entities in EU to continue their business activities while mitigating foreign-exchange risk, certain spot foreign exchange benchmarks that are used in financial instruments to calculate contractual payouts and that are designated by EC in accordance with certain criteria have been excluded from the scope of Benchmarks Regulation. The current transitional period for third-country benchmarks has been extended. EC has been given the power to further extend the transitional period by means of a delegated act, for a maximum of two years, if the assessment on which that review is based demonstrates that the envisaged expiry of the transitional period would be detrimental to the continued use of third-country benchmarks in EU or would pose a threat to financial stability.

    To ensure uniform conditions for the implementation of Regulation 2021/168, implementing powers have been conferred on EC to designate a replacement for a benchmark to replace all references to that benchmark in contracts. EC should exercise its implementing powers only in situations where it assesses that the cessation or wind-down of a benchmark may result in negative consequences that significantly disrupt the functioning of financial markets or the real economy in the Union. Furthermore, EC should exercise its implementing powers only where it has become clear that the representativeness of the benchmark concerned cannot be restored or that the benchmark will cease permanently. Before exercising its implementing powers to designate a replacement for a benchmark, EC should conduct a public consultation and should take into account recommendations by relevant stakeholders and in particular by private sector working groups operating under the auspices of the public authorities or the central bank. 

    At the time of the adoption of Benchmark Regulation it was expected that, by the end of 2021, third countries would establish similar regulatory regimes for financial benchmarks and that the use, in EU by supervised entities, of third-country benchmarks would be ensured by equivalence decisions adopted by EC or by the recognition or endorsement granted by competent authorities. However, limited progress has been made in that regard. The scope of the regulatory regime for financial benchmarks differs significantly between EU and third countries. Therefore, to ensure the smooth functioning of the internal market and the availability of third-country benchmarks for use in EU after the end of the transitional period, EC should, by June 15, 2023, present a report on the review of the scope of Benchmarks Regulation, as amended by Regulation 2021/168, with regard to its effect on the use of third-country benchmarks in EU. In that report, EC should analyze the consequences of the far-reaching scope of such regulation for EU administrators and users of benchmarks also with respect to the continued use of third-country benchmarks. EC should also assess whether there is a need to further amend the Benchmarks Regulationto reduce  its scope only to administrators of certain types of benchmarks or to administrators whose benchmarks are widely used in EU.

     

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    Effective Date: February 13, 2021

    Keywords: Europe, EU, Banking, Securities, LIBOR, Interest Rate Benchmark, Benchmark Reforms, Systemic Risk, Benchmarks Regulation, EC, European Parliament, European Council

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