EU ambassadors of member states agreed om the mandate of European Council for negotiations with the European Parliament on proposed amendments to the Benchmark Regulation (2016/1011). In July, EC had proposed to amend EU rules on financial benchmarks against the background of the transition to new reference rates on major capital markets, particularly in the backdrop of an expected phasing out of LIBOR by the end of 2021. European Council takes the view that the current rules that allow supervised entities in EU to make use of third-country benchmarks should continue to apply until the end of 2025 and not 2021, thus allowing smooth transition to a list of exempted benchmarks to be drawn up by EC.
In its negotiating mandate, European Council takes the view that the powers of EC should apply to a broader range of contracts and financial instruments that reference a benchmark than is proposed by EC. The expanded scope includes both financial contracts and instruments that are subject to the law of an EU member state and certain third-country law contracts. European Council also provides for the possible statutory replacement of benchmarks that do have a fallback provision for the cessation of a benchmark, but where the application of that clause would challenge financial stability and disrupt the market in a member state. On the basis of this negotiating mandate, the presidency will start negotiations with the European Parliament as soon as the Parliament has adopted its position.
At present, the Benchmark Regulation does not address the possibility of cessation of a critical benchmark. The aim of these amendments is to create a framework that would allow a statutory replacement rate to be in place by the time a systemically important benchmark such as LIBOR is no longer in use. This will reduce legal uncertainty regarding legacy contracts and avoid risks to financial stability. The new rules give EC the power to designate a statutory replacement rate to take the place of all references to a benchmark whose cessation would result in significant disruption to the functioning of financial markets in EU. When designating a statutory replacement rate, EC would have to take into account the recommendations of the dedicated working groups on replacement rates. In addition, the new rules ensure that EU benchmark users can, for the time being, continue to rely on third-country spot exchange rates to hedge the exchange-rate risk.
Keywords: Europe, EU, Banking, Securities, Benchmarks Regulation, LIBOR, Financial Benchmarks, Benchmark Reforms, Interest Rate Benchmarks, EC, European Council
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