Financial stability: Commission designates replacement rates for EONIA and CHF LIBOR
The Commission has nominated the replacement rates for two interest rate benchmarks, the Swiss Franc London Interbank Offered Rate (CHF LIBOR) and the Euro Overnight Index Average (EONIA). Interest rate benchmarks – also known as reference rates, or benchmark rates – are publicly accessible interest rates. They form a basis for a range of financial contracts such as mortgages, bank overdrafts, and other more complex financial transactions. Major reference interest rates play a pivotal role in the global financial system. Two reference rates – CHF LIBOR and EONIA – will cease being published at the end of this year. Given that there will still be outstanding contracts that reference CHF LIBOR and EONIA, the Commission has taken action to ensure financial stability, as well as to provide certainty, for citizens and businesses. Without Commission action in this area, it would no longer be possible to perform these contracts and many would need to be renegotiated individually. This is part of a global endeavour to ensure a smooth transition towards new safer risk-free rates. As of 1 January 2022, all references to CHF LIBOR and EONIA in contracts and financial instruments will automatically be replaced with references to new risk-free rates. For CHF LIBOR, the nominated replacement rate is the new Swiss Franc risk-free rate SARON. EONIA references will be replaced by references to the euro risk-free rate €STR. In both cases, an adjustment spread is applied so that undue value transfer is limited. Today’s designation follows public consultations on the issue and are in the interest of all EU citizens and companies who are party to such contracts. The statutory replacement will be automatic as of 1 January 2022 and contracts can continue without the need for intervention from contract parties. However, parties can still choose to renegotiate contracts bilaterally. Where parties choose to do so, the statutory replacement does not apply. The two decisions have been published in the Official Journal of the EU today. For the CHF LIBOR see here and for EONIA see here. The Commission encourages national authorities to engage with consumers, investors and businesses to further explain the implications of such replacements.