Shearman & Sterling LLP | FinReg | EU Amends Rules to Address LIBOR Cessation and Extends Use of Third-Country Benchmarks to 2023
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  • EU Amends Rules to Address LIBOR Cessation and Extends Use of Third-Country Benchmarks to 2023

    The Council of the European Union has announced that it has adopted the final text of the regulation to address LIBOR cessation, which will amend the EU Benchmark Regulation. According to the Council, the amending Regulation will be published in the Official Journal of the European Union on February 12, 2021 and it will enter into force and apply from February 13, 2021.

    The EU Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks.

    The amending Regulation aims to mitigate legal uncertainty and financial instability that could arise on the phasing out of LIBOR and other IBOR rates by the end of 2021. The amending Regulation gives the European Commission the power to replace references in contracts to critical benchmarks, other relevant benchmarks, and third-country benchmarks if their cessation would disrupt the EU markets. Any such statutory replacement of a benchmark would be limited to contracts and financial contracts that had not been renegotiated before the benchmark ceased and would not apply where contractual fallback provisions address the cessation of a benchmark. For master contracts, the statutory replacement would apply only to transactions entered into before the relevant date of replacement, even if later transactions could potentially be part of the same contract. In addition, parties to a contract would be able to agree to apply a different replacement benchmark.

    The BMR also includes transitional provisions under which no financial instruments and financial contracts in the EU may start to reference a benchmark provided by a third-country administrator on or after January 1, 2021, unless the benchmark and administrator are included in the register maintained by the European Securities and Markets Authority following an equivalence decision by the European Commission, or recognition or endorsement by a national regulator. However, a benchmark provided by a third-country administrator that is already being referenced in financial instruments and financial contracts in the EU on January 1, 2020, may continue to be referenced in those contracts and financial instruments. The amending Regulation extends the transitional date from January 1, 2021 to December 31, 2023 and provides the European Commission with the power, to be used by June 15, 2023, to extend that period by a maximum of two years (i.e. to December 31, 2025). However, an exclusion has been introduced and the transitional provision will not apply to any EU benchmark whose administrators relocate to a third country during the transitional period.

    Other changes to the BMR made by the amending Regulation are the exclusion from the scope of the BMR of a spot foreign exchange benchmark administered by administrators outside of the EU and that has been designated by the European Commission by June 15, 2023.

    View the Council's press release.

    View the adopted text of the regulation amending BMR.

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