Shearman & Sterling LLP | FinReg | Working Group on Euro Risk-Free Rates Publishes Guiding Principles for Fallback Provisions in New Non-Derivative Contracts
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  • Working Group on Euro Risk-Free Rates Publishes Guiding Principles for Fallback Provisions in New Non-Derivative Contracts
    01/21/2019
    The European Central Bank working group on euro risk-free rates has published guiding principles for fallback provisions in new contracts for euro-denominated cash products. Noting the work that is being undertaken by the International Swaps and Derivatives Association on fall-backs for derivatives referencing EURIBOR and other IBOR rates, the guidelines focus on non-derivative “cash products”, such as mortgages, loans, securitizations, covered bonds and secured finance transactions. The paper sets out the key features of the current legal framework and market practices for contracts referencing euro benchmarks as well as the existing fallbacks and proposes guiding principles for fall-back provisions in new contracts for cash products. The guiding principles are not legally binding and market participants are able to decide whether to adopt them. The working group has recommended €STR as an alternative reference rate and it is intended that it will be made available in October 2019. The guiding principles recommend that market participants take steps to ensure the robustness of the fallback language in their new contracts and to consider their marketing practices and communications about the transition from the IBOR rates to the alternative rates. In particular, the working group recommends that market participants should: (i) include a new permanent cessation trigger event in their new fallback provisions; (ii) use €STR as the main basis for a fallback rate, where appropriate; (iii) consider introducing an adjustment spread to be applied to the fallback rate; and (iv) consider providing for a degree of flexibility for the rate to be amended as well as striving for consistency across asset types.

    View the guidelines.

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