The European Commission proposed on Friday 24 July to amend EU rules on financial benchmarks to ensure that the discontinuation of a widely used benchmark does not undermine the financial stability of the EU.
In the short term, the aim is to prepare for the disappearance of LIBOR ('London Interbank Offered Rate'), an interbank reference rate on the London market that serves as the basis for indexing thousands of financial contracts. The UK's Financial Conduct Authority announced that it would stop supporting the production of this benchmark index at the end of 2021 and expected it to cease shortly thereafter.
EU rules allow the supervisors of certain widely used benchmarks to prevent their abrupt cessation. However, they do not address the discontinuation of what is known as a “critical benchmark”, such as LIBOR, to which European banks are particularly exposed for their own borrowing and lending to businesses.
The Commission therefore proposes to give the EU new legal powers to designate, where necessary, a replacement index for a widely used reference rate when it is discontinued, to avoid disruption to EU financial markets.
In choosing this replacement rate, the Commission states that it will take into account the recommendations made by the relevant industry working groups, e.g. the US Alternative Reference Rates Committee for LIBOR or the Working Group on Euro Risk-Free Rates for the EURIBOR.
The replacement rate will only be available for financial contracts that refer to a benchmark index at a time when this benchmark has ceased to be published. For any new contract, the Commission encourages market players to agree on a permanent replacement rate.
Furthermore, the proposed rules would only apply to contracts concluded by entities subject to prudential supervision, such as banks, investment firms or asset managers.
In concrete terms, for LIBOR, the Commission will be able to make use of this new power as soon as the effective date of termination is known. In addition, it is considering setting up a working group with Member States to ensure a smooth and uniform transition to the statutory replacement rate.
Further amendments have also been proposed to allow EU users to continue, in 2022, to use foreign exchange benchmarks provided in a third country to hedge against foreign exchange risk in their export and foreign investment activities.
See proposal: https://bit.ly/2D4z9zU (Original version in French by Marion Fontana)