As one of the first jurisdictions worldwide, the EU is putting in place a framework to ensure a smooth transition when financial benchmarks are terminated.
EU ambassadors today confirmed on behalf of the Council an agreement
reached between the German presidency and the European Parliament's
negotiators on amending the so-called Benchmark Regulation. The agreed
amendments are of key importance to avoid any systemic risks that might
result from the phasing out of the London Inter-Bank Offered Rate
(LIBOR) by the end of 2021. LIBOR reference rates and other major
benchmarks are widely used as references in a large variety of contracts
and financial instruments. The cessation of LIBOR does not result from
the withdrawal of the United Kingdom.
In less than six months from the presentation of the
legislative proposal by the European Commission, the Council and the
European Parliament have finalised a legal text that addresses the most
pressing issues when critical benchmarks cease. The swift agreement
leaves sufficient time to adjust a large number of contracts and
financial instruments in light of the expiry of the LIBOR benchmark in
one year. This agreement is essential in order to avoid significant
risks to the stability of our financial system and our economy.
Jörg Kukies, State Secretary at the German Federal Ministry of Finance
The aim of the amendments to the Benchmark Regulation is to make sure
that a statutory replacement benchmark can be established by the
regulators by the time a systemically important benchmark is no longer
in use, and thus protect financial stability on EU markets.
Mandatory replacement of benchmarks, including by EU legislation
The new rules give the Commission the power to replace so-called
'critical benchmarks', which could affect the stability of financial
markets in Europe, and other relevant benchmarks, if their termination
would result in a significant disruption in the functioning of financial
markets in the EU. The Commission will also be able to replace
third-country benchmarks if their cessation would result in a
significant disruption in the functioning of financial markets or pose a
systemic risk for the financial system in the EU.
Thus, a statutory benchmark will replace benchmarks in financial
instruments and contracts that contain either no contractual replacement
– a so-called 'fall-back provision' – or a fall-back provision which is
deemed unsuitable by regulators, for instance, because it could have an
adverse impact on financial stability.
A framework is also provided for the replacement of a benchmark through national legislation.
Use of third-country benchmarks
The Council and the Parliament have also extended the transition
period to ensure a smooth transition to the new rules for the use of
third-country benchmarks.
EU supervised entities will be able to use such benchmarks until the
end of 2023. The Commission may further extend this period until the end
of 2025 in a delegated act to be adopted by 15 June 2023, if it
provides evidence that this is necessary in a report to be presented by
that time.
The Commission report will also assess whether the legislation
concerning the use of third-country benchmarks by EU supervised entities
needs to be amended, and will be accompanied by a legislative proposal,
as appropriate.
Next steps
The Parliament and the Council will now adopt the amendments without further discussion as soon as possible.
European Council
© European Council
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article