EIOPA launched a consultation on the Interbank Offered Rate (IBOR) transitions, in context of the EU Benchmarks Regulation. EIOPA seeks to adopt a common approach, for all currencies, on transition to the new rates to continue producing consistent risk-free rate term structures. The comment period for this consultation ends on July 23, 2021. In parallel, EIOPA issued an information request under which certain insurance and reinsurance undertakings from the European Economic Area that are subject to Solvency II are requested to provide information on the impact of IBOR transitions on the solvency position of undertakings, with reference date March 31, 2021. Insurance and reinsurance undertakings that are requested to participate should submit the completed reporting template to the respective national supervisory authority by June 25, 2021.
EIOPA had published a discussion paper on IBOR transitions in January 2020. The recent market developments as well the responses received to that discussion paper have enabled a new opportunity, which is expected to facilitate the switch to the new instruments in a way that the impact can be minimized as much as possible. Thus, in this consultation paper, EIOPA presents a modified approach of the instant change option included in the discussion paper published in 2020. Furthermore, proposals on the treatment of the credit risk adjustment (CRA), the impact of the Deep Liquid and Transparent assessment, and the long-term average spreads (LTAS) are also considered. The focus of this consultation is to address the issues identified within EIOPA’s risk-free rate methodology and production and to propose solutions for consultation. Additional issues related to the IBOR transitions, which emerge outside the risk-free rate environment and may affect directly or indirectly the insurance industry and the policyholders are not covered in this consultation. The 2020 review proposes additional changes in the methodology, which are under review.
The risk-free rate methodology of EIOPA seeks to produce consistent risk-free rate term structures based on replicability, market consistency of the risk-free rate term structures produced, stability for insurance undertakings, interests of policyholders, and capability of being implemented via the production process of EIOPA. Consequently, EIOPA wants to remain transparent, follow rather than lead the market and avoid unnecessary material impact on undertakings, arising from a technical change due to IBOR transitions. The proposal included in this consultation is generic and can be applied to all currencies allowing at the same time some degree of flexibility on when to perform the switch.
Comment Due Date: July 23, 2021
Keywords: Europe, EU, Insurance, IBOR, Risk Free Rates, Benchmarks Regulation, Solvency II, EIOPA
Previous ArticleEBA Publishes Single Rulebook Q&A Updates for April 2021
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.