Benchmark Regulation: Council adopts position on amendments addressing LIBOR cessation
Member states’ EU ambassadors today agreed the Council’s mandate for negotiations with the European Parliament on the proposed amendments to the regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmark Regulation). Financial benchmarks are indices by reference to which amounts payable under relevant financial instruments or financial contracts, or the value of certain financial instruments, are determined.
The Commission proposed amending EU rules on financial benchmarks in July against the background of the transition to new reference rates on major capital markets, and in particular an expected phasing out of the London Inter-Bank Offered Rate (LIBOR) by the end of 2021. The Benchmark Regulation currently does not address the possibility of cessation of a critical benchmark. The aim of the amendments is to create a framework that would allow a statutory replacement rate to be in place by the time a systemically important benchmark such as LIBOR is no longer in use. This will reduce legal uncertainty regarding legacy contracts and avoid risks to financial stability.
The new rules give the Commission the power to designate a statutory replacement rate to take the place of all references to a benchmark whose cessation would result in significant disruption to the functioning of financial markets in the EU. When designating a statutory replacement rate, the Commission would have to take into account the recommendations made by dedicated working groups on replacement rates.
In addition, the new rules ensure that EU benchmark users can for the time being continue to rely on third-country spot exchange rates to hedge exchange rate risk.
In its negotiating mandate, the Council takes the view that the Commission’s powers should apply to a broader range of contracts and financial instruments that reference a benchmark than is proposed by the Commission. The expanded scope includes both financial contracts and instruments that are subject to the law of an EU member state and certain third-country law contracts.
The Council also provides for the possible statutory replacement of benchmarks that do have a fall-back provision for the cessation of a benchmark, but where the application of that clause would challenge financial stability and disrupt the market in a member state.
Finally, the Council takes the view that the current rules allowing EU supervised entities to make use of third-country benchmarks should continue to apply until the end of 2025 and not 2021, thus allowing a smooth transition to a list of exempted benchmarks to be drawn up by the Commission.
On the basis of this negotiating mandate, the presidency will start negotiations with the European Parliament as soon as the Parliament has adopted its position.