Member States’ ambassadors to the EU are expected to give their green light on Wednesday 7 October to the Council’s negotiating mandate on the proposal to amend EU rules to give the EU new powers to designate, where necessary, a replacement index for a widely used financial benchmark that is being discontinued in order to avoid disruption to financial markets (see EUROPE 12535/14).
In the immediate term, the aim is to prepare, from the end of 2021, 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.
EU rules allow the supervisors of certain widely used benchmarks to prevent their abrupt cessation. However, they do not address the termination of a so-called “critical importance” benchmark such as LIBOR.
The compromise text, dated 5 October and copied to EUROPE, maintains the general principle of the proposal, namely to authorise the Commission to designate, by means of an implementing act, a substitute index for disappearing indices in financial contracts or instruments within the meaning of the Directive 2014/65.
The text indeed recognises that the absence of such a mechanism would probably lead to heterogeneous legislative solutions by Member States, which would increase the risk of litigation and could disrupt the smooth functioning of financial markets.
As regards the scope, the Council considers that these powers should be conferred on the Commission for “critically important” benchmarks under Regulation 2016/1011, but also for third country benchmarks that are systemically important for the EU. The Member States’ competences with regard to indices of reference “of significant importance” and “of insignificant importance”. The text states that the new rules would not affect them.
In addition, the Council proposes to extend the Commission’s mandate to contracts or financial instruments concluded by entities which are not controlled entities subject to Regulation 2016/1011, but which are subject to the legislation of a Member State.
The text provides a strict framework for the Commission’s implementing powers, which could only be used following triggering events precisely defined in the text, which unambiguously demonstrate that the production of the benchmark to be replaced will cease definitively.
The replacement benchmark index should, according to the text, only apply to financial contracts or instruments that have not been renegotiated before the date of termination of the relevant index. Moreover, it should not apply where all parties have agreed to apply, before or after the entry into force of the implementing act, a different contractual fallback provision.
The text further clarifies that, for the benchmarks designated by the Commission as critical in a Member State in accordance with Regulation 2016/1011 and where the cessation or phasing out of those benchmarks may lead to significant disturbances in the functioning of financial markets in a Member State, the competent authority concerned should take the necessary measures to avoid such disturbances.
Thus, the text provides that, subject to a number of conditions, the Member State in which the majority of index contributors are located could designate one or more replacement indices for an index that is due to disappear. (Original version in French by Marion Fontana)