EC Proposes Amendments to Benchmarks Regulation
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.
Related Links
Keywords: Europe, EU, Banking, Securities, Benchmarks Regulation, LIBORs, Financial Benchmarks, EC, FCA
Previous Article
ECB Seeks Feedback on Publication of Compounded €STR RatesRelated Articles
BCBS Proposes to Amend Rules on Minimum Haircut Floors for SFTs
BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs.
EC Consults on Crisis Management and Deposit Insurance Framework
EC launched a targeted consultation on the review of crisis management and deposit insurance framework in EU.
EIOPA Sets Out Principles for Liquidity Stress Test for Insurers
EIOPA published a paper that sets out the methodological principles of insurance stress testing with a focus on the liquidity component.
BIS Launches Euro Green Bond Fund for Central Banks
BIS launched a EUR-denominated, open-ended fund for green bond investments by central banks and official institutions, following the launch of the first BIS green bond fund denominated in USD in September 2019.
EBA Announces Stress Test Timeline; ECB Sets Up Climate Change Center
EBA announced that it will launch the 2021 EU-wide stress test exercise, with the publication of the macroeconomic scenarios on January 29, 2021.
BoE Discontinues Form CX on Capital Expenditure and Finance Leasing
BoE announced that the reporting entities are no longer required to report Form CX after the fourth quarter of 2020 reference period, with the last collection on January 29, 2021.
PRA Updates Q&A on Branch Return, Announces End Date of COVID Facility
PRA published Version 3 of the questions and answers (Q&A) on the Branch Return form, with this version superseding the version published in October 2020.
IAIS Consults on Application Paper on Supervision of Control Functions
IAIS is consulting on a draft application paper on the supervision of control functions.
ECB President Answers Queries on Application of EU Taxonomy
ECB published a letter in which the President Christine Lagarde answered questions, from a Member of the European Parliament, on the application of the EU taxonomy on sustainable finance.
PRA Issues Direction on Capital Buffers, Finalizes PS1/21 on SM&CR
PRA published a direction for modification by consent of 5.1 to 5.3 and 5.5 of the Capital Buffers Part of the PRA Rulebook.
