Featured Product

    ECB Paper on Principles for Fallback Provisions for Cash Products

    January 21, 2019

    The working group on euro risk-free rates published a paper on the guiding principles for fallback provisions in new contracts for euro-denominated cash products. This working group is an industry-led group established in 2018 by ECB, the Belgian Financial Services and Markets Authority (FSMA), ESMA, and EC. Its main tasks are to identify and recommend the risk-free rates to serve as a basis for an alternative to the current benchmarks used in a variety of financial instruments and contracts in the euro area. The paper offers an overview of the legal frameworks and market practices applicable to cash products, such as mortgages, loans and bonds, that reference EURIBOR and EONIA, with a focus on fallback clauses.

    The paper emphasizes that it is important for market participants to prepare for the transition to risk-free rates. During 2019, the working group intends to recommend more detailed fallback language to be used in legacy and new euro-denominated contracts. In addition, the working group will consider best practices for contracts to ensure that new contracts are robust and resilient to the possible material alteration or cessation of the underlying benchmark.

    Major reference interest rates play a pivotal role in the global financial system. They are widely used in contracts for derivatives, loans, and securities. They are also used by market participants to value financial instruments and by investment funds as benchmarks for assessing their performance, among other things. Declining activity in the underlying interbank unsecured funding markets and challenges to the sustainability of panels contributing to these benchmark rates pose potentially serious risks to individual users of the rates and to the financial system more broadly. Therefore, in 2014, FSB had published its report on reforming major interest rate benchmarks, which sets out a series of recommendations to strengthen the existing benchmarks by underpinning them, to the greatest extent possible, with real transaction data and to develop alternative, nearly risk-free reference rates.

    In addition, Principle 13 of the “Principles for Financial Benchmarks,” which were published by IOSCO, states that users should be encouraged to take steps to make sure that contracts or other financial instruments that reference a benchmark have robust fallback provisions in the event of material change to, or cessation of, the referenced benchmark. Moreover, IOSCO also published a statement on matters to consider in the use of financial benchmarks, including contingency planning, particularly for scenarios in which a benchmark is no longer available. In Europe, the Benchmarks Regulation recently introduced new requirements for benchmark administrators, supervised contributors, and supervised entities using benchmarks, including requirements for the use of fallback provisions in contracts.

    At the request of the FSB’s Official Sector Steering Group, the International Swaps and Derivatives Association, Inc. (ISDA) is considering fallbacks for derivatives referencing EUR LIBOR, EURIBOR and other key interest rate benchmarks (ISDA IBOR fallbacks). In addition, ISDA has recently published the ISDA Benchmarks Supplement, which market participants may incorporate to provide primary fallbacks for derivatives in the event of cessation of an index until such time as the ISDA IBOR fallbacks are incorporated into the terms of transactions (upon which the ISDA Benchmarks Supplement provisions will be subordinated to the ISDA IBOR fallbacks in relation to the relevant IBOR). The ISDA Benchmarks Supplement also provides primary fallbacks in the event that a benchmark is not authorized or fails to maintain authorization under the EU Benchmarks Regulation, resulting in the parties to the relevant transaction (or the calculation agent, if different) being prohibited from performing their obligations under that transaction.

     

    Related Links

    Keywords: Europe, EU, Banking, Securities, Fallback Provisions, RFR, Euro-denominated Cash Products, Interest Rate Benchmark, FSB, IOSCO, ECB

    Related Articles
    News

    PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK

    PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.

    April 15, 2021 WebPage Regulatory News
    News

    EBA Finalizes Standards on Methods of Prudential Consolidation

    EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).

    April 15, 2021 WebPage Regulatory News
    News

    EBA Updates List of Other Systemically Important Institutions in EU

    EBA updated the list of other systemically important institutions (O-SIIs) in EU.

    April 15, 2021 WebPage Regulatory News
    News

    BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks

    BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.

    April 14, 2021 WebPage Regulatory News
    News

    UK Authorities Welcome FSB Review of their Remuneration Regime

    UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.

    April 14, 2021 WebPage Regulatory News
    News

    PRA and FCA Letter on Addressing Risks from Use of Deposit Aggregators

    PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.

    April 14, 2021 WebPage Regulatory News
    News

    MFSA to Amend Banking Act and Rules in Coming Months to Transpose CRD5

    MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.

    April 14, 2021 WebPage Regulatory News
    News

    EC Delegated Regulation on Specialized Lending Exposures Under CRR

    EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.

    April 14, 2021 WebPage Regulatory News
    News

    OSFI Proposes to Enhance Assurance Expectations for Basel Returns

    OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.

    April 13, 2021 WebPage Regulatory News
    News

    ECB Issues Results of Benchmarking Analysis of Recovery Plans of Banks

    ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.

    April 13, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6858