Council endorses new rules addressing cessation of financial benchmarks

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.