On 25 February 2019, the European Commission announced a political agreement reached by the European Parliament and the Member States whereby the compliance deadline for the European Benchmarks Regulation (EU) 2016/1011 (the “BMR”) has been moved back by two years to 31 December 2021. Market participants will thus have an extra two years to work through what will be an immensely complex transition to new or reformed benchmarks for all EU financial contracts.
Nevertheless, a few words of caution are required when looking in more detail at the proposed extension:
- Timing: On 25 February 2019, the European Parliament, the Member States and the European Commission reached a political agreement, which has not yet been voted on in the European Parliament. The next sessions of the European Parliament are scheduled for
- Scope considerations: According to the proposed political agreement, benchmarks administrators may continue to provide existing critical benchmarks until 31 December 2921. It is important to note that the proposed extension only applies for critical benchmarks (for the list of currently admitted critical benchmarks, please follow here) and not for all existing benchmarks. Market participant need hence to be careful when analysing and assessing whether their contracts reference a critical benchmark or not. Non-critical benchmarks cannot be used after 31 December 2019. The proposed political agreement is very clear when stating that only existing critical benchmarks may be used for existing and new financial instruments, financial contracts, or measurement of the performance of an investment fund until 31 December 2021.
Market participants should in this regard keep in mind that the EURIBOR reform is in the final stages and market expectation is that the revised EURIBOR will be in place in Q4 2019. Similarly, the non-BMR compliant EONIA is currently subject to consultation by the European Money Markets Institute (EMMI) and will see a recalibrated approach be implemented in October 2019 with a strong recommendation to transition the use of EONIA towards the new €STR. While EMMI will maintain EONIA as long as needed, the use of EONIA will nevertheless be limited in time. Finally, with regards to LIBOR, the same considerations apply with the UK Financial Conduct Authority encouraging the phase-out of LIBOR by 2021.
- Third-country benchmarks: when it comes to benchmarks that are administered outside the EU and have neither been officially recognised for use under the BMR, nor been endorsed by an EU administrator, these benchmarks may be used in the EU only if the benchmark is already used within the EU as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund or which add a reference to such benchmark prior to 31 December 2021. This extension for third-country benchmarks is also introduced to provide additional time for work with non-EU regulators on how these benchmarks can be recognized as equivalent or otherwise endorsed for use in the EU.
While this two-year delay does offer some much-needed breathing space, it will be important to maintain momentum on reform and avoid complacency. As highlighted by Mr. Jean-Louis Schirmann, Secretary General of EMMI, during his Keynote Speech at the ABBL Conference “Benchmarks Reform – The Transition to Risk-Free Rates and the Impact on the Luxembourg Financial Sector” held on 18 March 2019, the success of these reforms will depend on each and every market user – whether from a large or small institution – being engaged in these issues: reviewing their contracts, making provisions and engaging in the consultation processes around the reforms.
By Gilles Walers, Legal Adviser, ABBL