Commission to be granted rate-replacement powers

On 30 November 2020, the EU Parliament and Council reached agreement on Commission-proposed amendments to the BMR. In anticipation of LIBOR’s end’ 2021 demise, the amendments give the Commission to power to propose replacement for the benchmark categories:

• “critical” benchmarks, which influence financial instruments and contracts with an average value of at least €500 billion and could thus affect the stability of financial markets across Europe;
• benchmarks with no, or very few, appropriate substitutes whose cessation would have a significant and adverse impact on market stability;
• third country benchmarks whose cessation would significantly disrupt the functioning of financial markets or pose a systemic risk for the financial system in the Union.

A compromise was also reached in respect of the transition period for third country benchmarks, enabling the Commission to extend the period until 31 December 2025, such an extension will have to be duly motivated by a legislative proposal.

Final wording awaits approval by the Economic and Monetary Affairs Committee and the Parliament as a whole, we can expect official publication in the OJ over the next few weeks.

The amendments grant the Commission the power to designate a statutory successor for LIBOR, laying the groundwork for a partial, possible legislative solution. Any Commission-designated rate would only apply to entities subject to the BMR- EU banks and investment firms. Non-supervised entities seeking a statutory replacement rate would need to look to the laws of their own Member State.

While the agreement represents the first tangible step towards a top-down solution, it is no more than the potential for a first step on a long and complex road. Market participants should continue with the task of bilateral negotiations, rather than hoping for a European legislative sword to slice through the Gordian LIBOR knot.

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