Featured Product

    ECB Paper on Principles for Fallback Provisions for Cash Products

    January 21, 2019

    The working group on euro risk-free rates published a paper on the guiding principles for fallback provisions in new contracts for euro-denominated cash products. This working group is an industry-led group established in 2018 by ECB, the Belgian Financial Services and Markets Authority (FSMA), ESMA, and EC. Its main tasks are to identify and recommend the risk-free rates to serve as a basis for an alternative to the current benchmarks used in a variety of financial instruments and contracts in the euro area. The paper offers an overview of the legal frameworks and market practices applicable to cash products, such as mortgages, loans and bonds, that reference EURIBOR and EONIA, with a focus on fallback clauses.

    The paper emphasizes that it is important for market participants to prepare for the transition to risk-free rates. During 2019, the working group intends to recommend more detailed fallback language to be used in legacy and new euro-denominated contracts. In addition, the working group will consider best practices for contracts to ensure that new contracts are robust and resilient to the possible material alteration or cessation of the underlying benchmark.

    Major reference interest rates play a pivotal role in the global financial system. They are widely used in contracts for derivatives, loans, and securities. They are also used by market participants to value financial instruments and by investment funds as benchmarks for assessing their performance, among other things. Declining activity in the underlying interbank unsecured funding markets and challenges to the sustainability of panels contributing to these benchmark rates pose potentially serious risks to individual users of the rates and to the financial system more broadly. Therefore, in 2014, FSB had published its report on reforming major interest rate benchmarks, which sets out a series of recommendations to strengthen the existing benchmarks by underpinning them, to the greatest extent possible, with real transaction data and to develop alternative, nearly risk-free reference rates.

    In addition, Principle 13 of the “Principles for Financial Benchmarks,” which were published by IOSCO, states that users should be encouraged to take steps to make sure that contracts or other financial instruments that reference a benchmark have robust fallback provisions in the event of material change to, or cessation of, the referenced benchmark. Moreover, IOSCO also published a statement on matters to consider in the use of financial benchmarks, including contingency planning, particularly for scenarios in which a benchmark is no longer available. In Europe, the Benchmarks Regulation recently introduced new requirements for benchmark administrators, supervised contributors, and supervised entities using benchmarks, including requirements for the use of fallback provisions in contracts.

    At the request of the FSB’s Official Sector Steering Group, the International Swaps and Derivatives Association, Inc. (ISDA) is considering fallbacks for derivatives referencing EUR LIBOR, EURIBOR and other key interest rate benchmarks (ISDA IBOR fallbacks). In addition, ISDA has recently published the ISDA Benchmarks Supplement, which market participants may incorporate to provide primary fallbacks for derivatives in the event of cessation of an index until such time as the ISDA IBOR fallbacks are incorporated into the terms of transactions (upon which the ISDA Benchmarks Supplement provisions will be subordinated to the ISDA IBOR fallbacks in relation to the relevant IBOR). The ISDA Benchmarks Supplement also provides primary fallbacks in the event that a benchmark is not authorized or fails to maintain authorization under the EU Benchmarks Regulation, resulting in the parties to the relevant transaction (or the calculation agent, if different) being prohibited from performing their obligations under that transaction.

     

    Related Links

    Keywords: Europe, EU, Banking, Securities, Fallback Provisions, RFR, Euro-denominated Cash Products, Interest Rate Benchmark, FSB, IOSCO, ECB

    Related Articles
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write Down and Conversion Powers

    The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.

    September 17, 2021 WebPage Regulatory News
    News

    ECB to Consider Climate Risks When Reviewing Collateral Framework

    In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.

    September 17, 2021 WebPage Regulatory News
    News

    SRB Provides Update on Approach to Prior Permissions Regime

    The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.

    September 16, 2021 WebPage Regulatory News
    News

    APRA Issues Further Guidance on Application of Securitization Standard

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.

    September 16, 2021 WebPage Regulatory News
    News

    ACPR Publishes Corrective Version of RUBA Taxonomy

    The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.

    September 15, 2021 WebPage Regulatory News
    News

    Nordea Bank and EIB Sign Agreement to Fund Green Projects in Nordics

    The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.

    September 15, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQs on Capital Treatment of Overseas Subsidiaries

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.

    September 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7487