Featured Product

    ECB Report on Fallback Provisions in Contracts Referencing EURIBOR

    November 06, 2019

    ECB published a report, by private sector working group on euro risk-free rates, presenting recommendations for fallback provisions in contracts for cash products and derivative transactions referencing EURIBOR. These recommendations support compliance with the EU Benchmarks Regulation and enhance legal and commercial certainty. The working group recommends that market participants incorporate fallback provisions in all new financial instruments and contracts referencing EURIBOR, regardless of whether they fall within the scope of the Benchmarks Regulation.

    The key recommendations highlight that the legacy financial instruments and contracts referencing EURIBOR that were entered into after January 01, 2018 and that fall within the scope of the Benchmark Regulation should be covered by robust written plans prepared by supervised entities in accordance with Article 28(2) of the Benchmarks Regulation. For legacy contracts that do not contain appropriately worded fallback provisions, to the extent practicable, market participants should introduce EURIBOR fallback provisions, or enhance existing provisions, when such financial instruments and contracts are next amended or updated. Where no specific fallback provisions are recommended and pending further guidance from the working group or regulatory authorities, market participants may wish to consider including generic language in their fallback provisions. To this end, the working group is recommending a standard text for a generic EURIBOR fallback provision.

    The working group also highlighted the risk management implications of inconsistencies in fallback provisions and triggers and of incorporating different fallback trigger language for different asset classes and currencies. Side effects could arise from the lack of concordant language for the commonly used hedging product combinations. Market participants are recommended to consider these risks when developing trigger events and fallback provisions and assessing the feasibility and appropriateness of aligning them across asset classes and currencies.

    For derivatives transactions, at the request of the Official Sector Steering Group of FSB, ISDA is developing fallbacks for derivatives referencing LIBOR, EURIBOR, and other key interest rate benchmarks (the ISDA IBOR fallbacks) to address the event of permanent cessation. In addition, ISDA published the ISDA Benchmarks supplement that market participants may incorporate into their documentation to provide primary fallbacks for derivatives in the event of the cessation of an index; the working group considers this a convenient way to include fallback provisions. Supplementary consultations on EURIBOR and pre-cessation trigger events will be held by ISDA in the coming months.

    This report reminds the market participants of key messages of the January 2019 paper containing guiding principles for fallback provisions in new contracts for euro-denominated cash products. The paper provided 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 specific focus on fallback clauses, and it recommended a set of guiding principles promoting the use of effective fallback provisions in new contracts for euro-denominated cash products. This report, where relevant, also provides updates that reflect market developments and practices related to cash products and derivatives transactions referencing EURIBOR. 


    Related Links

    Keywords: Europe, EU, Banking, Securities, EURIBOR, Fallback Provisions, Benchmarks Regulation, Risk-free Rates, Interest Rate Benchmarks, Derivatives, ISDA, ECB

    Related Articles
    News

    HM Treasury Publishes Policy Statement Amending Benchmarks Regulation

    HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.

    October 21, 2020 WebPage Regulatory News
    News

    PRA Consults on Implementation of Certain Provisions of CRD5 and CRR2

    PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).

    October 20, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Rule to Reduce Impact of Large Bank Failures

    US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).

    October 20, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Rule on Net Stable Funding Ratio Requirements

    US Agencies (FDIC, FED, and OCC) adopted a final rule that implements the net stable funding ratio (NSFR) for certain large banking organizations.

    October 20, 2020 WebPage Regulatory News
    News

    FSB Sets Out Effective Practices for Cyber Incident Recovery

    FSB finalized the toolkit of effective practices to assist financial institutions in their cyber incident response and recovery activities.

    October 19, 2020 WebPage Regulatory News
    News

    ECB Publishes Eleventh Issue of the Macroprudential Bulletin

    ECB published eleventh issue of the Macroprudential Bulletin, which provides insight into the ongoing work of ECB in the field of macro-prudential policy.

    October 19, 2020 WebPage Regulatory News
    News

    HM Treasury Seeks Views on Review of Solvency II Regime for Insurers

    HM Treasury issued a call for evidence seeking views to reform the prudential regulatory regime—also known as Solvency II—of the insurance sector in UK.

    October 19, 2020 WebPage Regulatory News
    News

    ESRB Responds to EC Consultation on Review of Solvency II

    ESRB responded to the EC consultation on review of Solvency II regime.

    October 19, 2020 WebPage Regulatory News
    News

    HM Treasury Consults on Phase II of Future Regulatory Framework Review

    HM Treasury launched a consultation on Phase II of the Future Regulatory Framework Review, with the comment period ending on January 19, 2021.

    October 19, 2020 WebPage Regulatory News
    News

    EC Publishes Work Program for 2021

    EC adopted the work program for 2021.

    October 19, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5991