ECB published a consultation, which was launched by the working group on euro risk-free rates, on recommendations to address the legal implications for new and legacy contracts referencing the euro overnight index average (EONIA), as a result of the proposed transition from EONIA to the euro short-term rate (€STR). Responses to this consultation should be sent by June 12, 2019.
The consultation describes the different legal options discussed by the working group over the last few months to ensure a smooth transition from EONIA to €STR. Market participants are invited to give feedback on the recommended legal actions to ensure a market-wide smooth transition from EONIA to €STR. The consultation on the EONIA to €STR Legal Action Plan is structured into four sections—
- Recommended EONIA fallback rate that should be used on cessation of EONIA in new and legacy contracts, wherever possible and appropriate
- Continued use of EONIA in new contracts
- Legacy contracts maturing before December 2021, which is the EONIA discontinuation date
- Legacy contracts maturing after December 2021
The working group recommends that market participants consider replacing EONIA with €STR as a reference rate for all products and contracts and that they make all operational adjustments necessary for using €STR as their standard benchmark as soon as possible. It is recommended that new contracts referencing EONIA include robust fallback provisions and an acknowledgement that references to EONIA will be understood to be references to EONIA as modified after the change to its methodology on October 02, 2019. For legacy contracts referencing EONIA and maturing after December 2021, market participants should consider replacing EONIA as a primary rate as soon as possible or embedding robust fallback clauses referencing the recommended fallback rate for EONIA. Additionally, the working group intends to recommend €STR plus a spread (the one-off computation of the difference between €STR and EONIA in the context of the proposed recalibrated EONIA methodology) as the EONIA fallback rate.
The EONIA to €STR Legal Action Plan covers legacy and new contracts referencing EONIA in different asset classes (derivative transactions, collateral agreements, and cash products) and was developed by the working group in close cooperation with the relevant trade associations and a group of law firms that are members of the subgroup on contractual robustness. This consultation follows the publication of a set of general guiding principles for fallback provisions in new contracts for euro-denominated cash products and the recommendations on the transition path from EONIA to €STR, which the working group issued in January and March 2019, respectively. ECB will evaluate all the responses and prepare a summary of the feedback received. This summary will be discussed by the working group and published on the ECB website, along with the other documents related to the meeting of the working group on July 04, 2019.
Comment Due Date: June 12, 2019
Keywords: Europe, EU, Banking, Securities, EONIA, €STR, Legal Action Plan, Risk-Free Rates, Interest Rate Benchmarks, Fallback Provisions, ECB
Previous ArticleSam Woods of PRA Speaks About Style of Regulation in UK After Brexit
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.
ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.