Will recent developments mark the end of LIBOR and EURIBOR by January 2022?
Possibly, a major change for the benchmark roadmap has been discussed during the first reading in parliament on 14 Jan 2019. Members of the Committee on Economic and Monetary Affairs (ECON) voted almost unanimously in favor to the amendment of article 51 “Transitional provisions” of the Benchmark Regulation (BMR). It is likely that the following paragraph will pass within the current legislation period:
„4a. An existing benchmark designated as critical by an implementing act adopted by the Commission in accordance with Article 20 of this Regulation that does not meet the requirements to obtain authorisation in accordance with Article 34 of this Regulation by 1 January 2020 may, if its discontinuation would affect financial stability, be used until 31 December 2021.”
This Amendment will effectively extend the transitional phase for LIBOR, EURIBOR and EONIA by two years and has some major implications for the future benchmark landscape.
Short-term: reduction of operational risk in 2019
On 20 December 2018, the EU working group published a detailed roadmap of transition from EONIA to ESTER. This roadmap contains variables, many of which are still unknown as of today. The proposed amendment would allow market participants to use the benchmarks as they are published today even after 2019, taking some implementation pressure from market participants in the short run with regards to the ESTER-EONIA transition 2019.
If the working group’s roadmap fails to materialise and the amendment passes, we would see harmonised transition schedules of the EU benchmarks and the US SOFR (Paced Transition Plan).
Mid-term: increased implementation pressure on the market
Another implication lies in the shift of power caused by the amendment in lights of article 34 BMR “authorisation and registration of an administrator”. The administrator of a benchmark must apply to the national competent authority (NCA) of the country where the administrator is located; in the case of the EONIA/EURIBOR administrator EMMI that would be Belgium (FSMA). While prior to the amendment the FCA / FSMA had no real option other than to approve Evolved-LIBOR and Hybrid-EURIBOR (as no successor benchmark will be in place by year-end) things are different now. The exceeded transition period gives those NCAs a real option to genuinely assess any benchmark methodology proposed by the administrators and the power to shape the future of Europe’s benchmark indices. This scenario will potentially accelerate the benchmark transition because it technically eliminates the option to use any adjusted form of LIBOR or EURIBOR for new business from 2022 onwards.
Matthias Kirberger is Manager at LPA with focus on Regulatory Topics and Capital Markets Business. He has been supporting clients to cope with regulatory requirements such as EMIR, MiFID II and SFTR since many years.