EC proposed amendments to the EU Benchmarks Regulation to address risks of the expected phase-out of LIBOR at the end of 2021. The proposal intends to create a new framework to have a statutory replacement rate in place by the time LIBOR is no longer in use. A statutory replacement rate is a rate that EC can designate by law. Such a rate would take the place of LIBOR in all contracts and financial instruments that mature after 2021. EC also proposed an amendment to allow EU users to continue using the currency benchmarks provided outside EU.
Benchmarks are indices used to price financial instruments (bonds, loans, derivatives) and contracts (including households' mortgages) or to measure the performance of an investment fund. If a critical benchmark ceases to be published, thousands of contracts existing at the date of cessation can be disrupted and could, ultimately, threaten financial stability. Thus, EC proposed to amend the Benchmarks Regulation, which will empower EC to designate a replacement benchmark that covers all references to a widely used reference rate that is phased out, such as LIBOR, when this is necessary to avoid disruption of the financial markets in EU. EC could replace any reference to LIBOR with a reference to a suitable replacement rate. In selecting this replacement rate, EC will take into account recommendations made by the relevant industry working groups, such as the US Alternative Reference Rates Committee for the LIBOR or the Working Group on Euro Risk-Free Rates for the EURIBOR.
The statutory replacement rate will only be available for financial contracts that reference, for example LIBOR, at the time this benchmark ceases to be published. The powers of EC to designate a statutory successor for LIBOR would only apply to contracts concluded by supervised entities, such as banks, investment firms, or asset managers, as only these contracts are governed by the Benchmarks Regulation. Contracts that do not involve supervised entities would not benefit from the statutory replacement rate. For such non-supervised entities, the laws of the member states would need to extend the scope of the harmonized statutory replacement rate to also cover non-supervised entities. At an appropriate time, EC might recommend that national laws supplement the harmonized replacement rate that applies to supervised entities. EC is also considering setting up a working group with member states to ensure the smooth transition of all LIBOR referencing contracts to the statutory replacement rate in a uniform way.
Keywords: Europe, EU, Banking, Securities, Benchmarks Regulation, LIBORs, Financial Benchmarks, EC, FCA
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