European Council and Parliament reached an agreement on amending the Benchmark Regulation, which was also welcomed by EC. The agreed amendments are of key importance to avoid any systemic risks that might result from the phasing out of LIBOR by the end of 2021. The agreed amendments, proposed by EC in July 2020, to the Benchmark Regulation 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. The European Parliament and the Council also agreed to postpone the entry into application of the rules on third-country benchmarks until December 31, 2023, with the possibility of an extension by EC afterward. The agreed amendments will apply immediately after their publication in the Official Journal of the European Union.
The amendments to the Benchmark Regulation aim to ensure that a statutory replacement benchmark can be established by the regulators by the time a systemically important benchmark is no longer in use and, thus, protect financial stability on EU markets. The new rules give EC the power to replace "critical benchmarks," which could affect the stability of financial markets in Europe, and other relevant benchmarks, if their termination would result in a significant disruption in the functioning of financial markets in EU. The agreement on the proposed changes is very timely, as the UK FCA, the supervisor of LIBOR, announced that it will stop supporting this benchmark at the end of 2021 and expects its cessation shortly thereafter. As per the new rules, EC will be able to replace third-country benchmarks if their cessation would result in a significant disruption in the functioning of financial markets or if they pose a systemic risk for the financial system in EU. Thus, a statutory benchmark will replace the benchmarks in financial instruments and contracts that contain either no contractual replacement or a fallback provision that is deemed unsuitable by regulators. In the amended rules, a framework is also provided for the replacement of a benchmark through national legislation.
The European Council and the Parliament have extended the transition period to ensure a smooth transition to the new rules for the use of third-country benchmarks. The EU supervised entities will be able to use such benchmarks until the end of 2023. EC may further extend this period until the end of 2025 in a delegated act to be adopted by June 15, 2023, if it is deemed necessary in a report that is to be presented by that time. The EC report will also assess whether the legislation concerning the use of third-country benchmarks by EU supervised entities needs to be amended; the report will be accompanied by a legislative proposal, as appropriate. The Parliament and the Council will adopt the amendments without further discussion as soon as possible.
Keywords: Europe, EU, Banking, Securities, LIBOR, Interest Rate Benchmarks, Benchmarks Regulation, Benchmark Reforms, Systemic Risk, European Council, European Parliament, EC
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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.