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    ESMA Issues Statement on Readiness for Benchmark Cessation at Year-End

    December 13, 2021

    The European Securities and Markets Authority (ESMA) published a statement from the EUR Risk Free Rate Working Group (RFRWG) on preparedness for the cessation of EUR, GBP, CHF, and JPY LIBORs and EONIA and for ceasing the use of USD LIBOR in new contracts, at the end of 2021. With nearly two weeks until the end of the year, the RFRWG is reminding market participants to cease entering into new contracts that use EONIA and EUR, GBP, CHF, JPY, and USD LIBORs as soon as practicable and in general terms by December 31, 2021. This follows the March 2021 announcements by the UK Financial Conduct Authority’s (FCA) and the ICE Benchmark Administrator (IBA).

    The RFRWG has recommended the adoption of the Euro Short-Term Rate (€STR) plus 8.5 basis points as the alternative to EONIA in legacy and new contracts, after the end of this year. On October 22, 2021, European Commission confirmed €STR +8.5bps as the statutory replacement for EONIA. This replacement rate will apply to all contracts and financial instruments, under the European Union Benchmarks Regulation, from January 03, 2022, that have not been transitioned to an alternative rate or updated to robust risk-free rate fallbacks. For EUR, GBP, CHF, and JPY LIBORs, the RFRWG recommends the adoption of the selected alternative risk-free rates identified by the relevant national working groups in new and legacy contracts. In addition:

    • For CHF LIBOR, the European Commission has confirmed on October 22, 2021 the designation of Swiss Average Rate Overnight (SARON) compounded in advance as the statutory replacement rate for CHF LIBOR. This replacement rate will apply to all contracts and financial instruments, under the Benchmarks Regulation, from January 01, 2022, that have not been proactively transitioned or been updated with robust risk-free rate fallbacks. 
    • For the six GBP and JPY LIBOR settings, FCA has compelled IBA to publish them under a changed “synthetic” methodology for a limited period. According to FCA, for the determination of that methodology, “the Authority has taken into account market support that has already been established on a fair way of calculating a replacement value for LIBOR—that is, the relevant risk-free rates plus the relevant ISDA spread adjustment.”
    • For USD LIBOR, the RFRWG supports guidance published by the US regulatory authorities to cease use of USD LIBOR in new contracts as of the end of 2021 (except for limited use cases). For EUR LIBOR, the RFRWG reminds market participants that there is no statutory replacement rate available. Market participants should proactively transition to an alternative benchmark rate or update to robust risk-free rate fallbacks as soon as practicable.

    The Chairman of the EUR RFRWG has sent a letter to the European Commission formally requesting the designation of a statutory replacement rate for GBP and JPY LIBORs under the European Union Benchmarks Regulation. Outcomes remain pending at this time. In addition, the RFRWG references its December 09, 2021 recommendations on the cross currency swap conventions. The statement recommends alignment with the CFTC Market Risk Advisory Committee’s part II of the risk-free rate First initiative in EU interdealer cross currency swap markets and the adoption of €STR for the EUR leg of EUR versus USD cross currency swaps in the European Union interdealer market from December 13, 2021. The RFRWG recognizes that firms may be at different stages in their transition plans but reminds all market participants to be ready for the year-end deadline. Earlier, on June 24, 2021, the European Commission, the European Banking Authority, the European Central Bank, and ESMA gad published a joint statement strongly encouraging market participants to stop using all LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021.


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    Keywords: Europe, EU, Banking, Insurance, Securities, Benchmark Reforms, LIBOR Alternatives, LIBOR, EONIA, Benchmarks Regulation, Interest Rate Benchmarks, FCA, CFTC, EC, ESMA

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