The European Commission has proposed a number of amendments to the Benchmark Regulation (BMR) following a public consultation launched in October 2019.
The changes propose that if a critical benchmark, such as LIBOR, is set to be closed, the European Commission will be able to designate a replacement benchmark for financial contracts that reference the benchmark.
In the case of LIBOR, European Union banks are particularly exposed to the benchmark for their own borrowing, corporate lending and residential mortgages.
The European Commission has proposed this change in order to ensure critical benchmarks that are being closed do not “cause disruptions to the economy and harm financial stability in the EU”.
Gareth Parker, chief indexing officer at Moorgate Benchmarks, explained the proposed change effectively allows contracts referencing LIBOR to continue to function beyond the intended closure date of 31 December 2021.
Furthermore, the changes will also allow EU users to continue to use third-country currency benchmarks in order to enable EU companies covering the risk of foreign currency fluctuations.
Valdis Dombrovskis, executive vice-president at the European Commission, commented: “EU users of LIBOR should continue their preparations for its cessation at the end of 2021.
“However, we recognise that some LIBOR contracts cannot be renegotiated in due time and that is why we are proposing new legal powers for the EU to replace the LIBOR with another benchmark.
“The European Commission stands ready to cooperate with the UK authorities to prepare for the impact of LIBOR's cessation. We will ensure that EU contracts do not face a legal vacuum once LIBOR is phased out, thereby avoiding any risk to financial stability.”
The BMR came into effect in 2018 following the manipulation scandals of major interest rate benchmarks such as LIBOR and EURIBOR in 2012.
It requires all benchmark providers to register as a benchmark administrator with European providers already registering by the end of 2019 while third-country providers have until 31 December 2021.
The impact of the EU Benchmarks Regulation on the ETF industry
Parker continued: “However, the Commission has decided not to make changes to the regulation’s applicability to other third country index administrators…and therefore the deadline of 1 January 2022 for compliance with BMR stands.
“This leaves those administrators, many of which were presuming a reduction in the applicability of the regulation, with a limited timeframe to prepare their applications for EU registration, submit them and see them through the applications process.
“Failure to do so will mean the use of those benchmarks – funds and other investable products such as ETFs – must cease.”
