ECB published an opinion (CON/2020/20) on the proposal for a regulation to amend the Benchmarks Regulation (2016/1011) regarding the exemption of certain third-country foreign-exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. ECB, in its opinion, which is a response to a request from European Council, welcomes the main objective of the proposed regulation by empowering EC to adopt an Implementing Act to designate a statutory replacement rate for benchmarks that are undergoing a supervised process of orderly cessation. Where ECB recommends amendments to the proposed regulation, it has set out specific drafting proposals in a separate technical working document that has been appended to this opinion.
Upon the date of entry into force of the Commission Implementing Act, the replacement benchmark designated in that act would replace, by operation of law, all references to the benchmark that has ceased to be published in all financial contracts and instruments and measurements of the performance of an investment fund, subject to Benchmarks Regulation, where these contain no suitable fallback provisions. ECB also supports the proposed exemption, from Benchmarks Regulation, of foreign-exchange benchmarks administered from third countries that refer to a spot exchange rate of a third-country currency that is not freely convertible and that fulfil the other criteria set out in the proposed regulation. ECB notes that EC’s proposed power to designate a replacement rate is aimed primarily at contracts with EU-supervised entities that reference the LIBOR, as this benchmark may not be sustained after the end of 2021.
ECB does not view the proposed availability of a statutory replacement rate mechanism as an alternative to the transition from EURIBOR or LIBOR where a contract can feasibly be amended. ECB notes that, pursuant to the proposed regulation, when adopting the Implementing Act to designate a replacement benchmark, EC would be required to take into account, where available, the recommendation by an alternative reference rate working group operating under the auspices of the central bank responsible for the currency in which the interest rates of the replacement benchmark are denominated. ECB also notes that the proposed regulation does not set out the criteria for determining whether the fallback provisions in a contract referencing the benchmark in cessation are unsuitable and, hence, fall into the category of contracts to which the designated replacement rate would be applied, should ceasing publication of the benchmark be considered to significantly disrupt the functioning of financial markets in EU.
Related Link: Opinion (PDF)
Keywords: Europe, EU, Banking, Securities, Financial Benchmarks, LIBOR, Benchmark Reforms, Opinion, Third Country Benchmarks, EC, ECB
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