EUROPEAN COMMISSION Brussels, 24.7.2020 SWD(2020) 142 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) 2016/1011 as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation {COM(2020) 337 final} - {SEC(2020) 284 final} - {SWD(2020) 143 final}



Table of contents 1.Introduction: Political and legal context 1.1Critical benchmarks: political context 1.2Critical benchmarks: legal context 1.3Foreign exchange rates: political context 1.4.Foreign exchange rates: legal context 2Background 2.1The Interbank Offered Rates (“IBORs”) 2.2Foreign exchange rates 3Problem definition 3.1What are the problems? 3.2What are the problem drivers? 3.3How will the problem evolve? 4Why should the EU act? 4.1Legal basis 4.2Subsidiarity: Necessity of EU action 4.3Subsidiarity: Added value of EU action 5Objectives: What is to be achieved? 5.1Disorderly IBOR transition

5.2Loss of an EU-based risk management tool 5.3Options to avoid a disorderly IBOR cessation 5.4.Options for avoiding loss of EU-based risk management tools 6What is the baseline from which options are assessed? 6.1Disorderly IBOR transition 6.2Loss of EU-based risk management tools 7Description of the policy options 7.1Disorderly IBOR transition 7.2Loss of EU-based risk management tools 8Option discarded at an early stage 8.1Disorderly IBOR transition 8.2Loss of an EU-based management tool 9What are the impacts of the policy options? 9.1Disorderly IBOR transition 9.2Loss of an EU-based risk management tool 9Impacts per category of stakeholder 10.1Disorderly IBOR transition 10.2Loss of EU-based risk management tools 11How do the options compare? 11.1Disorderly IBOR transition

11.2Loss of EU-based risk-management tools 11.3Preferred option 12How will actual impacts be monitored and evaluated? 12.1Orderly IBOR transition 12.2Loss of an EU-based risk management tool Annex 1: Procedural information 1.1Lead DG, Decide Planning/CWP references 1.2Organisation and timing 1.3Consultation of the RSB 1.4Evidence, sources and quality Annex 2: Stakeholder consultations 2.1 Workshop 2.2. Feedback statement of the Inception Impact Assessment relating to the review of the Benchmark Regulation84 2.3 Public consultation87 Annex 3: Who is affected and how?100 3.1Practical implications of the initiative100 3.2 Summary of costs and benefits104 Annex 4: Background information109 Annex 5: Confidential annex117

List of tables Table 1 – Bid-offer spreads, and their percentage changes for four Asian currencies Table 2 – EU trade relationships with Korea and India (data in € billion) Table 3 – Summary of the main features of the four policy options – IBOR Table 4 – Summary of the main features of the four policy options – risk management tool Table 5 – Comparison of the IBOR options Table 6 – Comparison of the 3rd country options Table 7 – Monitoring and evaluation – orderly IBOR transition Table 8 – Monitoring and evaluation – loss of an EU-based risk management tool Table 9 – Business loan exposure to USD LIBOR across maturity ranges. Table 10 – EU banks’ wholesale funding sources Table 11 – Break down of derivatives exposures Table 12 – Overview of identified alternative RFRs in the five LIBOR currency areas Table 13 – Notional IBOR exposures by currency and asset class (in EUR) List of figures Figure 1 – Difference in hedged liabilities pre and post USD LIBOR cessation Figure 2 - $12 Trillion Problem (USD trillion) Figure 3 – Respondent’s main activity in relation to benchmarks Figure 4 – Activity sector of respondent (more than one answer allowed) Figure 5 – Location of respondents

Figure 6 – Notional IBOR exposures by currency (in EUR trillion) Figure 7 – Breakdown of data sources used in the determination of USD LIBOR Figure 8 – Transaction volume (monthly) underpinning the determination of EURIBOR for different tenors (January 2020) Glossary Term or acronym Meaning or definition €STR Euro Short Term Rate ARRC Alternative Reference Rates Committee. The ARRC is a group of private-market participants convened by the Federal Reserve Board and Federal Reserve Bank of New York in cooperation with the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of Financial Research, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the U.S. Treasury Department. The ARRC was initially convened in 2014 to identify risk-free alternative reference rates for U.S. dollar (USD)LIBOR, identify best practices for contract robustness, and create an implementation plan with metrics of success and a timeline to support an orderly adoption). BBA British Bankers' Association BMR EU Benchmark Regulation (Regulation (EU) 2016/1011) BMR Regulation (EU) 2016/1011 (the Regulation / the (EU) Benchmark Regulation) CMU Capital Markets Union CCPs Central Counterparties Critical benchmark A benchmark that has no or very few market-led substitutes and whose existence and accuracy are relevant for market integrity, financial stability or consumer protection in one or more Member States (BMR, recital 36) ECB European Central Bank EMMI European Money Markets Institute (the administrator of EURIBOR) EMTA Emerging Markets Trade Association ESMA European Securities and Market Authority EUR RFR WG Working Group on euro risk-free rates (Euro area private sector body dealing with fall-backs to EURIBOR) EURIBOR Euro Interbank Offered Rate FCA Financial Conduct Authority (the UK competent authority for securities and markets) FSB Financial Stability Board, an international organisation comprising high-ranking officials from central banks, national treasuries and securities markets regulators FSB OSSG FSB Official Sector Steering Group on Benchmark reform FSMA Financial Services and Markets Authority (the Belgian competent authority for securities and markets) FICC Fixed Income Clearing Corporation FX Foreign Exchange GCF General Collateral Financing IBA ICE Benchmark Administration (the current administrator of LIBOR) ICE InterContinental Exchange IBOR InterBank Offered Rate ICMA International Capital Market Association Interbank (money) market The market of loans and deposits between banks for maturities ranging from overnight to one year ISDA International Swaps and Derivatives Association LIBOR London Interbank Offered Rate LMA Loan Market Association MMSR Money Market Statistical Reporting NDF Non-Deliverable Forward contract OTC Over The Counter. Refers to products that are not traded on trading venues, but between an investment bank and a corporate counterparty. RFR Risk-Free Rate SI Systematic Internaliser, denoting an investment bank that regularly trades in a certain financial instrument (e.g., a derivative contract) against its own book (i.e., internalises these trades) SMMD Sterling Money Market Data Collection Reporting Tough legacy contracts Contracts that mature after the potential cessation date of the critical benchmark they reference and that cannot be renegotiated in time to migrate to a replacement rate or to include fall-back provisions UCITS Undertakings for Collective Investment in Transferable Securities USD United States Dollar 1.Introduction: Political and legal context Under the heading “An Economy that Works for People”, the Commission Work Programme for 2020 provides for a review of its regulation on financial benchmarks, Regulation (EU) 2016/1011 (the “Benchmark Regulation” or “BMR”). The European co-legislators adopted the BMR in 2016 in order to make benchmarks more reliable, by introducing a licensing regime for administrators of benchmarks. The BMR also introduced requirements for the contribution of input data that is used to calculate a benchmark. Finally, the BMR also regulated the use of financial benchmarks. In particular, the BMR rules require EU supervised entities (such as banks, investment firms, insurance undertakings, fund managers) to use only benchmarks whose administrator has been authorised. Benchmarks administered in third countries can only be used via the equivalence, recognition or endorsement procedures. By setting governance and data quality standards for benchmarks that are referenced in financial contracts, the BMR aims to strengthen the trust of capital market participants in indices used as benchmarks in the Union. It contributes to the Commission’ efforts in favour of a true Capital Markets Union (CMU). The Benchmark Regulation applies since January 2018. The transitional regime for benchmarks administered outside the Union (“third country benchmarks”) allow for continued use of such benchmarks for a limited period of time, even if these indices do not comply with the BMR. The transitional regime has been extended, but will now expire at the end of December 2021. Benchmarks with systemic relevance are designated as “critical” by the European Commission and are subject to more stringent requirements and supervision. On the other hand, some benchmarks, such as central bank policy or currency exchange spot rates, are exempt from the scope of the BMR. 1.1Critical benchmarks: political context Global political context Interbank overnight rates (IBORs) are the most important (and currently only) category of critical benchmarks. IBORs reflect the rate of interest that banks charge each other for the borrowing of short term funds. Interbank rates are traditionally assembled on the basis of rates communicated to benchmark administrators by a panel of banks. IBOR rates are therefore often referred to as “panel bank” rates because contributions reflect estimates by banks of the rates at which they could borrow funds in the interbank market. The rates communicated do not necessarily reflect actual transactions, they can also comprise estimates by banks. As a consequence of the manipulation of interbank rates during the financial crisis, G20 leaders agreed to improve the oversight and governance of interest rate benchmarks. In 2013, G20 leaders asked the Financial Stability Board (FSB), a group of senior officials representing national treasuries, central banks, and supervisory agencies, to review the world’s major interbank benchmarks. In 2014, the FSB published a report on benchmark reform and recommended a “multi-rate approach” with two broad objectives: (1) strengthening existing benchmarks and other potential reference rates based on interbank markets by underpinning them to the greatest extent possible with transaction data; and (2) developing alternative, nearly risk-free, overnight reference rates (RFRs). The recent global trend to develop nearly risk-free overnight rates as alternatives for existing IBORs is shown in Annex 4.1. Replacing IBORs with risk-free rates aims to make interbank indices more stable and representative (overnight risk-free rates are based on real transactions and not on estimates by banks). EU political context In line with the recommendations of the FSB, the reform of critical benchmarks, such as the IBOR rates, is a top priority of the Commission’s Capital Market Union (CMU) Action Plan. Preparing for the orderly phase out of a major benchmark supports one of the principal objectives set by the CMU Mid Term Review, namely to strengthen bank lending and stable financing of the corporate sector through capital markets. Interbank borrowing rates are important indices used to calculate the interest due for corporate loans, but also in issuing short and medium term debt and in hedging debt positions. Therefore, the availability of, and the legal certainty around, interbank rates affects the capacity of banks to lend to the real economy and perform their core functions. Finally, the measures considered in this assessment are to be viewed as supporting “an EU economy that works for people”, which is one of the headline ambitions set out in the 2020 Commission Work Programme. Bank lending to retail customers is an important element of an economy that serves the needs of the people. Retail loans reference IBOR rates, whose movement determines loan repayment amounts, which is a key consideration in managing personal finances for many citizens. By providing the tools for a legally sound transition from IBOR rates, this initiative benefits retail customers holding loans referencing those rates. 1.2Critical benchmarks: legal context

According to the BMR, investment banks in the EU are only allowed to offer contracts based on reference indices provided by authorised EU administrators. The Benchmark Regulation also grants the Commission the power to designate as “critical” benchmarks, if they are used in financial contracts and credit agreements with a value of at least EUR 500 billion. Due to their systemic relevance, critical benchmarks are subject to enhanced supervision by the relevant competent authority. For critical benchmarks, the relevant competent authority can impose changes in the way the critical benchmark is calculated and in the way that data used to calculate it is collected. The regulator also has the power to demand changes to a benchmark methodology in order to ensure that the benchmark continues to represent the market it intends to reflect. If a critical benchmark ceases to be published, contracts still in course at the date of cessation can be disrupted and, ultimately, financial stability threatened. The BMR, therefore, grants the competent authorities powers to require an administrator to continue the administration of a critical benchmark (mandatory administration). The competent authority also has the power to require banks participating to a panel to continue contributing data (mandatory contribution). Another tool to preserve a critical benchmark are the rules on transition of a critical benchmark to a new administrator. However, the BMR does not contain provisions aimed at addressing how to manage the consequences of the cessation of a critical benchmark, e.g., due to “non-representativeness” on account of a lack of transactions in the interbank market. In 2016, at the time the BMR was designed and adopted, the possibility that a critical benchmark would cease to be published was regarded as remote. The emphasis was on preserving the critical benchmark by using the above mentioned tools. 1.3Foreign exchange rates: political context While foreign exchange spot rates play a crucial role for the international economy (see Section 2.2), spot exchange rates often are reflective of central bank monetary policies. In some countries, central banks have implemented controls to restrict the publication of foreign exchange rates by administrators located outside their local jurisdiction. The countries that operate restricted foreign exchange rates include India, South Korea, Taiwan, Philippines, Malaysia, Indonesia, Argentina, Nigeria and Kazakhstan. Locally supervised entities publish daily spot exchange rates for these currencies. Local publications are the only source for the spot exchange rate as the central banks in these jurisdictions prohibit the development or publication of spot exchange rates outside of their jurisdiction. These spot exchange rates are not so much designed to reflect an underlying market as they are designed as policy tools to influence a market. In consequence, they are unlikely to comply with the governance and data quality requirements of the BMR. In countries that operate foreign exchange controls, the availability of currency hedging tools, such as forwards or swaps (see Section 2.2 for a description on how these tools function) is also limited. Liquidity for hedging currency exposures in the countries themselves is therefore thin. By comparison, the European market for currency forwards or swaps is more active and liquid due to the diversity and number of market participants. Hedging against convertibility risks is therefore done with forward contracts and currency swaps offered and traded in the European Union. 1.4.Foreign exchange rates: legal context The Benchmark Regulation regulates the “use of a benchmark” by EU supervised entities”. As a consequence, foreign currency spot rates referenced in EU traded hedging tools (derivative contracts) for “determining the amount payable under a financial instrument” are in the scope of the Benchmark Regulation, as long as the derivative involves an EU bank as a counterparty. At the end of the current transitional period the reference to currency spot exchange rates to calculate amounts payable under forward contracts and swaps offered and traded in the EU will no longer be allowed, except if the spot rates are recognised or endorsed for use in the Union. This means that, at the beginning of 2022, EU banks lose access to many public policy rates administered outside the EU, including spot exchange rates that they use as “inputs” to offer EU forwards and swaps for the hedging of currency risks. In the legislative preparatory works for the Benchmark Regulation, no specific mention can be found of foreign exchange benchmarks, with the exception of recital (1), which makes reference to their alleged manipulation. The matter of scope was discussed in the impact assessment – although the impacts of the scoping decision were not assessed. Based upon feedback from a stakeholder consultation, it was decided that the scope of the Regulation should be wide, encompassing all benchmarks used in financial instruments traded on EU trading venues. The detailed explanation of the legislative proposal makes it clear that this choice was motivated by the general principle that wherever discretion is exercised in producing a benchmark, there is a risk for manipulation. On the premise that any scope for regulatory arbitrage and any incentives for de-location should be avoided, the same or similar rules were set out for third country benchmarks that would be used in the EU. It was not discussed that this extension of the EU regime could deprive EU users of third country benchmarks for which no alternative exists in the EU. The issue of foreign exchange rates was identified, albeit not explicitly, when designing the BMR central bank exemptions, which cover third country central banks. What was not known at the time was that certain central banks would not publish their foreign exchange rates themselves, but delegate this task to private sector organisations. In that sense, the current extension of the foreign exchange rate exemption builds on the existing central bank exemption expanding it to exchange rates for non convertible currencies published by the private sector. The proposal thus remedies a slight design flaw in the current central bank exemption. 2Background 2.1The Interbank Offered Rates (“IBORs”) The BMR defines “critical benchmarks” as benchmarks used for financial instruments or financial contracts with a value of at least EUR 500 billion. Interbank Offered Rates (“IBORs”) rates play a significant role in global financial markets as reference rates for a large volume and broad range of financial instruments and contracts. Figure 1 in Annex 4.2 summarises the notional outstanding for the two main IBOR rates, LIBOR and EURIBOR, for all relevant currency rates and indicates all asset classes for which IBOR exposures exceed USD 1 trillion. This impact assessment focuses on the London Interbank Offered Rate (LIBOR) due to its most likely cessation by the end of 2021. LIBOR. LIBOR, produced by ICE Benchmark Administration (IBA), is the reference interest rate for trillions of financial instruments and contracts, covering a vast array of financial instruments and contracts from interest rate derivatives, loan agreements, short-and medium term money market issuances and bonds to residential mortgages. LIBOR is the world’s most widely used borrowing rate. Banks all over the world reference LIBOR to calculate interest due on short and medium term loans. Most floating rate short and mid-term wholesale bank financing references LIBOR. Banks in the European Union appear particularly exposed to USD LIBOR, both for their USD borrowing and corporate lending books (see Annex 3.1.3 for an overview of EU banks USD funding sources). According to the Bank for International Settlements (BIS), an organisation representing the world’s central banks, around USD 400 trillion of financial instruments and contracts reference LIBOR. LIBOR is also the discount rate most widely used to value future cash flows and investment portfolios (See Annex 4.2 for further details). In addition, the LIBOR rate is the core rate for risk management, valuation and performance measurement. LIBOR is supervised by the UK Financial Conduct Authority (FCA). In 2017, the FCA announced serious concerns about the sustainability of LIBOR and warned market participants to prepare for its phase out by the end of 2021, hence launching the first process of replacing a major interbank borrowing rate. Despite being administered in the UK, LIBOR is heavily used by European entities in their business activity. EURIBOR. The European Money Market Institute (EMMI) administers and publishes the Euro Interbank Offered Rate (EURIBOR) in Brussels. EURIBOR is currently the second most widely used interest rate benchmark globally. EURIBOR aims to measure the rate at which credit institutions in the EU can borrow wholesale funds denominated in euros. Apart from a derivatives exposure estimated at more than EUR 100 trillion, primarily European corporate loan and retail mortgage markets reference their contracts to EURIBOR. More than one trillion euro in retail mortgages reference EURIBOR, mostly in the Spanish, Italian and Finnish retail markets. Mortgage exposures are typically long-term contracts with maturities of 30 or more years (see Annex 4.3 for further details). 2.2Foreign exchange rates Foreign exchange (FX) markets facilitate trade in goods and services and allow European companies and citizens to conduct transactions in foreign currencies. FX markets are necessary for companies to buy and sell products in other countries, but also for capital market transactions where companies or investors convert between currencies to move funds into foreign assets. FX markets are essential to make direct foreign investments (buying fixed assets) in other currency areas or to make portfolio investments, such as the purchase of stock, bonds or other financial assets denominated in different currencies. Investment flows account for the largest volume of FX transactions.

The importance of emerging market currencies Over the last three years the trading of emerging market currencies outgrew that of major currencies. This is in particular true for Asian restricted currencies. While global turnover rose by 33%, the turnover of emerging market currencies rose by almost 60% in the three years to 2019. On average 35% of the volume in emerging market currencies is traded by large commercial and investment banks and investment firms that participate in the interdealer market. This interdealer activity generates liquidity enabling banks to service to their customer’s requirements, i.e. institutional and corporate customers. On the other hand, 55% of volume is traded by the large investment banks with smaller financial institutions, such as smaller commercial banks and investment firms servicing clients both on- and off-shore; mutual funds, pension funds and insurance companies, that trade foreign exchange products for hedging onshore exposures, investing and risk management purposes; and by hedge funds. The role of currency hedging EU corporations and investors that export or invest in other jurisdictions face the risk of currency convertibility and fluctuation of foreign exchange rates. A transaction in a foreign currency will, at some stage, require that one currency is exchanged for another in the international foreign exchange market. Before the transaction parties will be exposed to the risk that the exchange rate will move against them, especially if the currency is not readily convertible into the investor’s base currency. This gives rise to the need to enter into a forward contract to hedge the risk of (delayed) conversion and volatility of the spot exchange rate. The need to manage currency risk has given rise to a variety of hedging tools, such as currency forward contracts and foreign exchange swaps. For example, an EU exporter that is set to receive payments in a foreign currency in 90 days may wish to lock in the price of this foreign currency in euro currency units by entering into a forward contract. Future delivery of the foreign currency is, in such way, guaranteed at a forward euro rate set in the forward contract. In this constellation, the EU corporate is hedging its foreign currency exchange rate risk. The possibility to hedge exchange rate risk allows European companies to enter markets which they would otherwise be reluctant to enter by reducing the exchange rate risk of the transaction. An outright forward contract is an agreement to deliver a foreign currency at a future date at a rate agreed by the parties at conclusion of the contract. The agreed rate for delivery of the foreign currency in the future is the forward exchange rate. A foreign exchange swap consists of a simultaneous spot and forward transaction whereby a trader enters into a spot transaction to settle an expiring forward contract and enters into a new forward contract with a new settlement date in the future. As the spot purchase will be used to satisfy the forward delivery commitment, there is no exchange of the underlying amount on the settlement date, however there will be an exchange of payments reflecting the movement of the exchange rates between the agreement of the forward exchange rate and the spot exchange rate at the settlement date. There is no delivery of the underlying currency, the swap will pay out the difference between the agreed rate and the spot rate at expiry. The payment leg of the swap is therefore known as a non-deliverable forward (“NDF”) (See Annex 4.5 for further details). A trend associated with the growth in emerging markets currencies was a surge in trading of non-deliverable forward contracts to hedge currency exposures of global investors investing in emerging market assets. EU financial stakeholders are very large users of non-deliverable forward contracts in currencies with a restricted rate, accounting for: 38% of global contract volumes in Korean Won (KRW); 52% of global contract volumes in Taiwanese Dollars (TWD) and 50% of global contract volumes in Philippine Pesos (PHP). Based on data available from the 2019 Triennial Survey conducted by the BIS, the open interest of USD vs KRW and USD vs TWD non-deliverable forward contracts involving EU counterparts are estimated to amount to USD 931 billion and USD 585 billion respectively. Market infrastructure used for offering forward contracts Non-deliverable forwards in currencies such as INR, KRW, TWD and PHP, are actively traded on EU regulated platforms. These regulated platforms are fundamental to the market’s structure and critical to providing liquidity and transparency to the forward markets. Interbank forward trades are not executed bilaterally but are traded on the primary electronic execution platforms such as NEX Markets (previously EBS) and Refinitiv, both of which are regulated as Multi-lateral Trading Platforms (MTFs). Primary platforms are a critical source of liquidity that enables banks to hedge their currency exposure build up by offering non-deliverable forwards to their clients. For institutional investors and the more sophisticated corporates, banks will provide prices for entering into a forward contract to their clients via multi-dealer platforms, such as FXAll and 360T. These platforms are also are regulated as MTFs and banks use liquidity sourced from the primary platforms to offer forward contracts to their clients on the multi-dealer platforms. These multi-dealer platforms are critical to institutional investors who are obliged to provide their clients with best execution. Whilst, price is not the only determinant in achieving best execution it is a key component and being able to see prices being quoted by multiple banks on a single multi-dealer venue is critical to meeting the best execution obligations. Obviously trading bilaterally continues to be an option, but it introduces execution risk that is extremely difficult to mitigate, particularly in more volatile emerging market NDF currencies. Using data collected from the operator of a multi-dealer platform regulated as both an MTF and a Swap Execution Facility (SEF) by the CFTC, approximately 47% of 2020 year-to-date total volume traded on the platform has been traded on the MTF, 37% has been traded on the SEF, and 16% has been traded on a bilateral basis. As soon as non-deliverable forward contracts are available through EU investment banks on MTFs or is offered by an EU bank in a systematic manner, the forward contract is covered by the BMR. Risk management requirements for EU banks offering forward contracts European currency derivatives markets are highly regulated. Recent regulatory changes have ensured that currency devaluations or extreme market volatility in emerging markets did not reach an existential (for individual EU banks) or systemic (for the entire EU market) levels. Relevant regulatory changes and other market practice improvements include: (I)Risk capital charges and the related regulatory drive to discourage banks speculating on their own balance sheet mean that running inventories of European banks are significantly reduced. Most European banks run reasonably balanced books, such that the bigger risk during market dislocation is counterparty credit risk – exposure to clients rather than the bank’s own net position; (II)Post-trade clearing of interbank trades greatly reduces the counterparty risk from interbank trades used to hedge other open positions. Even though the clearing of non-deliverable forwards is not mandated under EMIR, there has been significant growth in the absolute volume of non-deliverable forward transactions being cleared over the last four years, which reflects the reduced risk appetite of banks and the prevalence of centrally cleared contract offerings; (III)Initial and variation margin from clients has reduced the counterparty risk from dealing with clients. In Europe, the main derivatives trading banks become subject to the exchange of margin under the Basel Committee's margin requirements for non-centrally cleared derivatives with the implementation of the requirements under EMIR in 2016; (IV)XVA desks (these are “value adjustment” desks that are used by banks to adjust derivative prices for the risk of a counterparty (credit valuation adjustment (CVA)) and the risk of their own default (debit valuation adjustment (DVA)) are now commonplace to further mitigate the credit risk arising from counterparty default on derivatives contracts.

Other EU regulations implemented since the Financial Crisis mean that EU banks are required to ensure they do not incur any single exposure which could cause them to fail as a result of a single catastrophic event, such as a currency collapse. These include: (I)Requirements under the Bank Recovery and Resolution Directive for banks to draw up recovery and resolution plans, including identification and management of key exposures and taking steps to ensure the recoverability and resolvability of the institution while minimising the impact on the wider financial sector; (II)Requirements for ring-fencing of certain banks' core business from risks arising from proprietary trading; (III)Regimes in a number of EU jurisdictions introducing clearer responsibility for senior managers as well as personal liability for breaches of obligations including obligations regarding prudent management of businesses and ensuring effective control over the business. On account of these regulatory constraints, EU banks offer a currency forward contract to a client only if they can mitigate the resulting risk to their balance sheets. Each bank applies individual risk limits that allow it to keep open positions for a certain quantity of currency risk for a certain period of time. On the other hand, the ability to hedge risk with other banks and a multitude of other market participants is a prerequisite for compliance with those limits. The following considerations are relevant in this respect: (I)The total pool of currency forwards in any one currency is a zero-sum environment. This means that the entire quantity of open contracts across all counterparties add up to a net exposure of zero. Different market participants have different motivations for trading currency hedges. The European market for forward contracts has developed because exporters and importers wish to hedge their exposure to restricted foreign currencies. The corporate client base of each bank offering currency hedges includes a mix of exporters and importers, enabling the bank to match buyers with sellers as efficiently as possible and so reduce the bank’s net exposure to the currency. Other clients include investors wanting to gain exposure to the underlying currency and protect the value of any assets they have in that currency in a way similar to the importers/exporters. Other market participants, such as hedge funds, may use currency forwards as purely speculative instruments. This range of interests and participants increases market liquidity in a given NDF and creates further opportunities to reduce the bank’s net currency exposures. (II)European banks manage their exposure by acting as an intermediary market maker, offsetting positions between their client base of importing or exporting corporates, their investor client base and in the interbank market. While banks necessarily hold some currency risk for some period of time, as not all client positions can be matched simultaneously, the goal is always to minimise this exposure through a liquid and well-functioning market. The need to have a deep and liquid pool of offsetting forward contracts as the basic ingredient of any risk management tool implies that the BMR “third country” chapter was not designed to prevent EU banks from writing currency forward contracts, both to hedge their own exposures and those of their clients. As a practical matter, within European banks’ trading businesses, market risk is managed through a series of limits that are typically set at the product level and then further allocated to a desk or instrument level. For foreign exchange, limits are typically set for each currency pair. These risk limits are typically monitored intra-day by an independent risk function using Value at Risk calculations which determine the maximum loss expected (or worst case scenario) on a position, over a given time period and given a specified degree of confidence. These Value at Risk calculations are tested and calibrated on a regular basis and are subject to supervision by prudential regulators. Credit risk is a function of tenor and settlement amount and, like market risk, is managed through a limit structure and ultimately constrained by either the capital requirement or Leverage ratio under Basel III. The credit risk associated with NDFs is low when compared to other instruments due to the fact that the tenor of transactions is very short term, the most liquid tenor is 1 month (87% of USD/KRW forwards have a tenor of less than 3 months, 94% have a tenor of less than 6 months (Source BIS Triennial Survey 2019). 3Problem definition Drivers Problems Expected consequences IBOR cessation D1. The BMR has no mechanism to accompany the FSB’s recommendations to move interest rate benchmarks to risk-free rates P1. The European Union will not have in place a robust system to transition from IBOR rates to risk-free or other internationally recommended IBOR replacement rates. C1. Absence of a robust transition framework will result in a competitive disadvantage for European companies and the European financial sector D2. The BMR is silent on an orderly transition from a critical benchmark to an internationally recommended successor rate, e.g., the BMR has no provisions to mandate an interim rate to be published for tough legacy contracts P2. European banks and non-financial companies will face legal uncertainty throughout the internationally mandated benchmark reform process and will have a stock of legacy contracts that will not have an agreed fall-back reference rate by the time the most important of the critical benchmarks, LIBOR, disappears at the end of 2021. C2. Litigation around the issue of “contract frustration” will consume considerable time and effort, weakening the European real economy and financial capacities, uncertainty as to the contractually agreed interest rates will lead to payment delays and potential defaults on debt or loan instruments D3. (out of scope). The EU financial sector is heavily dependent on certain IBOR rates, e.g., they have considerable exposures to USD LIBOR maturing after 2021 P3. European banks will not be able to manage their assets and liabilities once the IBOR rate disappears without an adequate replacement C3. Legal uncertainty will weaken the international competitiveness of the European banking sector Foreign exchange rates D1. The BMR covers all listed foreign exchange derivatives P1. EU companies could only hedge their foreign exchange risk with over-the-counter products C1. Over-the-counter products are less price transparent than listed derivatives, making currency risk (volatility) management more expensive D2. The BMR only covers EU investment banks that offer foreign exchange derivatives P2. EU companies would need to buy currency hedging derivatives from non EU banks C2. Loss of competitiveness for European banks as they can no longer offer the more transparent listed products to EU companies D3. (out of scope). There are no onshore spot markets for many foreign currencies P3. EU companies would need to exchange currencies on the offshore spot markets without the opportunity to hedge currency volatility by contracting a rate in advance C3. Loss of competitiveness as European companies can only hedge with over-the-counter products or with listed derivatives offered by non-EEA banks (smaller choice, higher price) 3.1What are the problems? 3.1.1IBOR rates: The legacy contracts issue In July 2017, the UK’s FCA announced that it would not exercise the “mandatory contribution” powers granted by the BMR after the expiration of a gentlemen’s agreement with the LIBOR panel banks at the end of 2021. The FCA’s announcement has generated the expectation that LIBOR publications will effectively cease shortly after the end of 2021. On 25 March 2020 the FCA reaffirmed its view that, despite the coronavirus pandemic, the assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet. Further details on the LIBOR cessation plan are set out in Annex 4.4) In case of cessation by the expected date, there is currently no agreed replacement rate for USD LIBOR references in many financial instruments or contracts that: (1) mature after the potential cessation date (December 2021) and that (2) cannot be renegotiated individually by that date (defined as “tough legacy contracts”). In these circumstances, the risk is that a contract party could refuse to fulfil its commitments due to the absence of an agreed reference index determining mutual payment obligations in a security or financial contract. Likewise a party could request the early termination of the contract because of the cessation of the agreed USD LIBOR index. The problem has two angles: (1) the absence of a replacement rate for USD LIBOR; and (2) the absence of a mechanism whereby a potential replacement rate would be integrated into “legacy contracts”. The absence of a replacement rate. In order to enable contractual negotiation to be successful, the relevant private sector working groups will need to reach agreement on a generally accepted fall-back rate. This agreement needs to cover each of the asset classes affected by an IBOR phase-out. Finally, as contractual negotiations take time, this agreement needs to be reached significantly before the critical IBOR rate is discontinued. Several private sector working groups are currently working on alternatives to LIBOR (see section 1.1 and detailed list in annex 1.4). These alternatives will most likely not be ready in time to ensure that all market participants can agree, let alone to renegotiate their contracts before the expected LIBOR cessation date at the end of 2021 (See Annex 3.2 for an estimation of the cost).

An additional problem linked to “availability” is that the aforementioned work streams have focused on overnight risk-free rates (RFRs). RFRs are rates that reflect relatively riskless overnight transaction while IBOR rates reflect term lending with longer maturities. RFRs therefore do not incorporate duration and credit risk of a longer-term issuer of, e.g., a loan or a debt instrument. While the new RFRs can serve as robust and credible overnight reference rates rooted in transactions in liquid markets, they do so at the expense of not capturing banks' marginal term funding costs. The work in the relevant private sector working groups has also revealed that central banks will confine themselves to publishing secured or unsecured overnight rates (SOFR, SONIA, €STR, see Annex 1.4). The overnight transactions that they receive to assemble the overnight rates will not reflect the credit risk inherent in borrowing money for longer terms. A replacement rate that is effective as a tool to manage assets and liabilities on a European banking book must therefore reflect their marginal term funding cost, which means that the rate has to be credit sensitive. Given that financial intermediaries are both lenders and borrowers, they require a lending benchmark that behaves not too differently from the rates at which they raise funding. A rate that lacks such credit sensitive component would not be effective as a replacement. Moreover, lenders may be forced to reveal sensitive data about their own funding cost when LIBOR disappears. Discussions with stakeholders to understand their needs and concerns related to the LIBOR transition has only very recently led to the creation of a Credit Sensitivity Group – a work stream separate from the work of the ARRC – with the aim to build a shared understanding of the challenges that banks of all sizes and their borrowers may have in transitioning loan products from LIBOR. Private sector benchmark aiming to create credit-sensitive rates have emerged recently. These initiatives are in an early stage and it is not yet clear how all stakeholders affected by the cessation of USD LIBOR would be able to agree on a fall-back rate in sufficient time to renegotiate all legacy portfolios before expected LIBOR cessation. But, as set out in the following section, even in a scenario where stakeholders were to agree on a USD LIBOR fall-back rate, stakeholders noted that there would still be not enough lawyers nor time to effectively adapt all the legacy contracts to the new agreed fall-back rate. Problems linked to embedding a legacy rate into existing LIBOR contracts. Embedding a LIBOR successor rate (should it become available) in financial contracts constitutes a major challenge for many sectors of the economy, foremost corporate lenders and borrowers, clearing houses and a host of other financial service providers, such as accountants, valuation agents, asset and portfolio managers, whose portfolios are often benchmarked to LIBOR (e.g., a typical contractual risk objective might read: “returns will not be less than 12 month LIBOR over any twelve month period”). The main challenge with embedding a replacement rate (once available) into existing LIBOR contracts stems from the fact that the number of contracts that would need to be renegotiated before the end of 2021 remains largely unknown. The vast majority of mid-tier financial and especially non-financial market participants are, at least at present, unable to quantify the precise legacy stock maturing beyond 2021 across the main asset classes that reference USD LIBOR (loans, debt, floating rate notes, derivatives, deposits, etc.). These institutions are also not in a position to assess the precise evolution of this legacy stock (i.e., their maturity ranges) over the next five years. Even some of the major corporate lenders have not been able to provide precise figures on the number of their USD LIBOR contracts maturing beyond 2021. Most mid-sized and smaller financial and non-financial entities are currently assessing their debt issuances, their loan and debt portfolios as well as their derivatives exposure. In the course of these assessments many institutions are identifying LIBOR references in often-unexpected places. For example, the major European manufacturers have yet unquantifiable exposures in customer contracts that reference USD LIBOR. What emerges, however, is that the LIBOR exposures of contracts maturing beyond 2021 are concentrated in USD LIBOR and that EU banks and corporate borrowers account for a large percentage of LIBOR contracts with maturity ranges beyond 2021. Several EU banks granted DG FISMA confidential access of their balance sheet exposures to USD LIBOR. While the precise data is commercially sensitive, a common theme emerges across the European banking sector: USD LIBOR exposures occur across four asset classes: (1) loan agreements and advances; (2) corporate deposit accounts; (3) debt instruments, both debt issued by banks as well as debt instruments held as assets by banks; (4) derivative contracts. In terms of contracts to be renegotiated, each bank has thousands of UDS LIBOR loan arrangements, several hundreds of debt instruments, several hundred corporate accounts and tens of thousands of derivative contracts on their balance sheets. Exposures in loans and debt range in the lower to upper two digit USD billions, while derivatives exposures often exceed a trillion USD. Around 50% of contracts in each asset class mature beyond 2021. The high percentage of USD LIBOR exposures maturing beyond 2021 is a common feature in all non-US banks. EU banks do not have a large USD retail deposit base and therefore need access to USD funding via the wholesale markets (floating rate notes or longer-term debt issuances, (see Annex 3.1.3 for an overview of EU banks USD funding sources). Banks remunerate retail deposits at rates lower than USD LIBOR, usually the Federal Funds Rate. This provides banks with a USD retail base and a lower cost of funding when compared to their non-US peers. For this reason, EU banks will be far more affected by the disappearance of USD LIBOR than their US competitors. Figure 1 shows that while a US deposit taking bank, post LIBOR cessation, is expected to have around 10% of unhedged money market liabilities, the unhedged liabilities of a European wholesale bank are expected to be around 40%, including not only money market financing but also financing via short-term currency swaps (see Annex 3.1.2. for further detail). In terms of the expected trajectory of IBOR exposures over time, Figure 2 indicates that Bloomberg expects a peak in LIBOR maturities at the end of 2024, but that roughly a third of LIBOR contracts will mature beyond 2027. These estimates correspond to the data collected by DG FISMA (see above) and to what ICE Benchmark Administration (IBA), the company that publishes LIBOR, expects in terms of trajectory, namely an early peak at the end of 2024 that would cover roughly two-thirds of current contracts and a longer draw-down period for the remaining one-third longer term contracts that will last beyond 2028. USD LIBOR also plays a major role in corporate (“real economy”) financing in the Union. Data from the International Capital Markets Association (ICMA), an association that represents corporate issuers of debt instruments, shows that around 75% of presently pending floating rate notes (more than USD 400 billion) mature post 2021. In terms of the trajectory for maturities and amounts, ICMA has established the following: Floating rate notes maturing in 2022 (USD 122 BN); 2023 (139 BN); 2024 (59 BN); 2025 (21 BN); 2026 (25 BN); 2027 (16 BN) and 2028 (50 BN). Volumes begin to drop off as of 2028.

An additional complication with respect to loan agreements is that USD LIBOR is used in loan agreements governed by a variety of different laws. Whilst a majority of syndicated loans in Europe tend to be under English law, there will be those governed by other laws (e.g. German, French, Dutch law, see annex 3.1.4 for an example with derivative contracts). Any option to address legacy contracts would need to be effective across all of the above legal systems. The above figures on contracts, nominal exposures and maturity ranges are representative also for other panel bank based IBOR rates. For EU mid-size banks, a potential EURIBOR cessation would have a potentially even larger impact. For example, a EU27 mid-sized bank would have two-thirds of its balance sheet exposure on EURIBOR and only less than one-third on USD LIBOR. Other banks reflect a 70/30 split between EURIBOR and LIBOR balance sheet exposures across all of the five relevant asset classes, with EURIBOR often accounting for 70% of loan and debt exposures and somewhat less than 70% in the area of deposits and derivatives. 3.1.2Foreign exchange rates: The loss of EU-based risk management tools In case the BMR, as of 2022, prevents EU banks from offering forward contracts that calculate their pay-out by reference to the spot exchange rates of some of the main trading partners, EU exporters and investors can no longer hedge their currency exposures with forward contracts offered by EU banks. Legal restrictions in the country where these spot rates are published (Section 1.3.) prevent the emergence of replacement rates for these spot rates in the EU. In these circumstances, the risk is that EU exporters, investors and EU banks will no longer be able to efficiently hedge their currency exposures. The problem has two angles: (1) The foreign spot exchange rate is indispensable to calculate payments due under the hedging contract; and (2) due to their monetary policy function, foreign currency spot rates in non-convertible currencies are unlikely to be equivalent, recognised or endorsed for use as a calculation rate in the EU. The foreign exchange spot rate is an indispensable component in calculating the payment due under the EU hedging instrument. The EU hedging instrument needs to reference the relevant spot rates in order to calculate the pay-out under the derivative instruments (spot exchange vs. the agreed forward exchange rate, see Section 2.2). The spot exchange rate will be either calculated by a central bank (these spot rates are already BMR exempt) or by a benchmark administrator which may be appointed by a central bank (these spot rates will no longer be exempt after December 2022). Every day, the administrator will publish the rate at which a currency, e.g. Korean Won (KRW), shall be traded against USD. Forward rate agreements for the KRW will then calculate their pay-out by comparing the agreed forward rate with the published spot rate. If this comparison can no longer be made, the forward payments can no longer be calculated with the consequence that the respective payment obligations under the forward contract can no longer be executed. Spot exchange rates in non-convertible currencies are unlikely to be BMR compliant. Because a published currency spot exchange rate is the product of a variety of sovereign decisions, such as the institution of exchange controls, currency pegs or exchange rate management by the issuer countries’ central banks, such rates are unlikely to be BMR compliant. In other cases, sanctions and credit restrictions have impacts on the convertibility of a country’s currency, which again entails that published spot exchange rates are volatile in line with exchange controls or other policy measure taken in response to, e.g., sanctions or political events. Typically non-deliverable forwards markets develop in some of the most risky and volatile currencies where EU companies have the most risk. According to figures gathered in the public consultation and other informal surveys carried out by DG FISMA, there are at least seven currency spot exchange rates which reflect sovereign decisions, exchange controls, currency pegs or other forms of exchange rate management, but are not administered by local central banks directly (and therefore non-exempt from the BMR): 1.KRW South Korean Won, administered by the Seoul Money Brokerage Services (SMBS) 2.TWD Taiwan dollar, administered by Taipei Forex Inc 3.PHP Philippine peso, administered by the Philippine Bankers Association (PBA) 4.INR Indian Rupee, administered by FBIL Reference Rate Financial Benchmark India 5.ARS Argentinian Peso, administered by Mercado Abierto Electrónico S.A (MAE) 6.NGN Nigerian Naira, administered by the FMDQ OTC Securities Exchange 7.KZT Kazakhstan Tenge, administered by the Kazakhstan Stock Exchange (KASE) Scope of the problem. Starting point for this analysis are the figures supplied in Section 2.2 of this impact assessment according to which EU companies account for between 38 to over 52% of the currency exposures to three important Asian currencies. The precise percentages per currency are (1) 38% of global Non-Deliverable Forward (NDF) volumes in Korean Won (2) 52% of global NDF volumes in Taiwanese Dollars and (3) 50% of global NDF volumes in Philippine Pesos. If these spot exchange rates are not compliant at the end of the transition period, as of January 2022, EU entities will no longer be able to trade the indicated EU percentages of the above global derivatives (NDF) volumes through investment banks inside the Union or on regulated trading venues in the EU. This could lead to delocalization of forward trades or unhedged currency exposures, both in the EU non-financial and financial sectors. Unhedged foreign exchange exposures are highly undesirable. The currency volatility observed in the course of March 2020 because of the COVID 19 crisis serves as an example. As of March 2020, the market has seen significant volatility in the Asian FX markets resulting in a loss of liquidity and a widening of spreads. This acts as a foretaste of the volatility European companies will face, should they no longer be able to hedge their exposures with derivative transactions (NDFs). The following table shows indicative bid-offer spreads, as basis points, and their percentage changes from before the recent market dislocation and from 19 March 2020 for four Asian currencies for NDF trades with differing maturities and amounts. Trade size USD mio Trade Tenor USDTWD USDIND USDKRW USDPHP Pre Post % change Pre Post % change Pre Post % change Pre Post % change 20 1m 1.5 2 33% 1.5 2.75 83% 0.3 0.75 150% 3 5 67% 3m 1.5 2.25 50% 2.245 3.5 56% 0.35 0.85 143% 3.5 5.5 57% 40 1m 2.5 3.5 40% 3 4.25 42% 0.5 1 100% 4.5 6.5 44% 3m 2.5 4 60% 3.5 5 43% 0.6 1.15 92% 5 7.5 50% 60 1m 3.25 4.75 46% 3.5 5 43% 0.65 1.25 92% 5.5 8 45% 3m 3.72 5.5 47% 4 5.5 38% 0.75 1.5 100% 6.25 9.75 56% 3.2What are the problem drivers?

3.2.1Legacy contracts Driver 1: The BMR has no mechanism to accompany the FSB’s recommendations to move interest rate benchmarks away from panel bank rates. The BMR has no tools for an orderly phase out of panel bank rates that are deemed no longer representative of the interbank markets. To the contrary, when it comes to critical benchmarks, the BMR’s provisions all aim to maintain the administration of critical benchmarks in the form of panel bank rates. For example, the BMR stresses improvements in the governance and supervision of panel bank rates, as well as the methodologies used for collecting and processing the data on which these rates are established. It also has provisions to impose mandatory panel bank contributions and mandatory administration of critical benchmarks, albeit limited to five years. Driver 2: the BMR has no provisions to mandate an interim rate to be published for legacy contracts. The BMR contains rules allowing the regulator to demand changes to a benchmark methodology in order to maintain or re-establish the representative nature of a benchmark (Article 23(6)(d) BMR). The entire BMR philosophy rests on the premise that critical benchmarks need to be maintained. The BMR, therefore, is not equipped to deal with the “legacy” consequences of the cessation of a critical panel bank rate. Driver 3 (Out-of-scope): EU banks are heavily exposed to USD LIBOR funding and need a credit sensitive fall-back rate for legacy contracts. The fact that EU banks are reliant on USD wholesale financing is demonstrated in the balance sheet comparison in Annex 3.1.2. A switch to a risk-free reference rate would be easier to achieve for banks with a large USD retail deposit base (which is remunerated at a nearly risk-free federal funds rate). European banks have very limited USD retail deposits and will, in consequence, be more affected by the phase-out of USD LIBOR than their US peers who finance corporate lending out of their large USD (retail) deposits. This driver does not result from either the BMR or from its implementation, hence it is referred to as an “out-of-scope” driver. 3.2.2The loss of EU based risk management tools Driver 1: European banks can only offer hedging tools that reference BMR compliant rates. Although companies themselves are not subject to the BMR, the financial counterparty to a derivative transaction is a “supervised entity” subject to the BMR. This means that EU banks can only offer currency forward contracts or swap that calculate pay-outs by reference to spot exchange rates that either comply with the BMR or that are exempt from it (e.g., spot rates provided by central banks or other public authorities). The same limitation does not apply to non-EU banks. Driver 2: There is no EU onshore replacement for a foreign exchange spot rate. As foreign exchange spot rates are subject to sovereign intervention, they are administered “on-shore” in the relevant countries. The administering organisations are either central banks or central bank backed self-regulatory organisations, exchanges or banking/financial institutional associations in these countries. Off-shore replicas of an onshore foreign exchange rate are strictly prohibited as they are seen as diminishing the effectiveness of foreign exchange interventions. 3.3How will the problem evolve? 3.3.1Legacy contracts As set out at various meetings convened at the Financial Stability Board, three possible end-game scenarios for LIBOR, arranged in order of likelihood, are envisaged: Scenario 1 (likely) LIBOR ceases to exist. Some regulators take the view that the interest in phasing out potentially non-representative panel bank rates takes precedence over the interest to find a solution for all legacy contracts that mature after the potential cessation date (“tough legacy contracts”). The absence of a legacy rate would provide strong incentives for an early transition. It would, however, not address the fact that a large legacy loan portfolio currently referencing USD LIBOR would have no obvious and commercially sensible rate to fall back to. In the absence of such a rate being available in significant time before the LIBOR cessation, a speedy renegotiation scenario is unlikely. Scenario 2 (possible, but unstable) LIBOR continues on a voluntary basis, but is assessed as not representative. This is an uncertain scenario and will depend on panel banks risk appetite and importance in the underlying market. If the second ISDA consultation finds a consensus in the course of 2020, a FCA’s non-representativeness statement, issued at any point in time after December 2021, would trigger derivative contracts to move their legacy contracts to the designated ISDA fall-back. As explained above, this might cover up to 60% of pending derivatives exposures. Most of tough legacy contracts (see 3.1.1 for details on tough legacy contracts), such as loans and short and medium term debt, will most likely not be able to do so due to the difficulties in amending contracts at short notice. In addition, Central Clearing Counterparties, organisations that ensure that all derivatives trades are completed, have indicated that they would not continue to clear LIBOR derivatives at the point LIBOR is declared to be no longer representative. However, authorities currently have no statutory means to allow ongoing use of a no longer representative LIBOR rate (or a more sustainable version of such a rate as a legacy rate) for tough legacy contracts – i.e. those that would otherwise be frustrated or face severe disruption if they were unable to carry on using LIBOR. Scenario 3 (unlikely) LIBOR continues on a voluntary submission-basis and passes the representativeness-test. This scenario is unlikely and will depend on the panel bank’s willingness to assume the risk of contributing quotes based on expert judgement to the LIBOR administrator. This outcome would be fragile and likely temporary, prone at all times to unravel, when a panel bank does decide to depart, triggering the regulator to launch an assessment of continued “representativeness”. 3.3.2Loss of EU-based risk management tools In case the BMR prohibits EU banks and trading venues offering hedging contracts to reference foreign exchange spot rates as of January 2022, EU corporations face several choices: Scenario 1 (likely) Hedging with ‘over-the-counter’ contacts. EU businesses wanting to hedge foreign exchange risk when no BMR-compliant listed contracts are available for this purpose would need to turn to less regulated over-the-counter instruments. Over-the-counter trades (over-the-counter derivatives are traded bilaterally with a bank and are less transparent than derivatives traded on an exchange) with a non-European bank would be outside the scope of the BMR. In case of switching to over-the-counter trading, there would be a loss in pre- and post-trade transparency and a loss of liquidity, two features associated with trading derivatives on an exchange. In addition, parties would have to arrange clearing bilaterally, as opposed to straight-through clearing that is associated with trading derivatives on an exchange.

Scenario 2 (possible, but potentially expensive) Hedging with contracts listed outside the EU. Some of the disadvantages in over-the-counter trading could be mitigated by using derivatives listed on exchanges in counties outside the EU and offered by non-EU banks. These products will have to be procured and provided offshore. Trading derivatives in a third country might be more expensive for European companies and delocalisation of currency hedging to third country banks will be a net loss of business for European banks. Scenario 3 (unlikely) EU corporates stop hedging currency risk. If the current BMR exemption for third country currency exchange spot rates expires, EU banks will be prohibited from referencing foreign spot exchange rates published in a series of third countries. Hedging of currency risk – out of the EU – might become impossible in practice, as EU banks cannot provide the product and non EU operators might not be available to provide the product or at an affordable cost. This would have the effect either of reducing the ability of EU corporates to invest in markets where the spot rate is not published by the local central bank, but by a private body reflecting the monetary policy of its local central bank. This puts EU companies in a competitively inferior position to non-EU companies who can continue to hedge via derivatives traded in their own jurisdictions. 4Why should the EU act? 4.1Legal basis The legal basis for the adoption of the Benchmark Regulation BMR is Article 114 of the Treaty on the Functioning of the European Union (TFEU). Adoption of amendments aimed at enhancing the efficiency of this regulation by providing supervisory powers to the relevant competent authority and de-regulating certain benchmarks should also fall under the same legal basis. More in particular, Article 114 of the Treaty on the TFEU confers the European Parliament and the Council the competence to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. Article 114 TFEU allows the EU to take measures not only to eliminate current obstacles to the exercise of the fundamental freedoms, but also to prevent, if they are sufficiently concretely foreseeable, the emergence of such obstacles, including those which make it difficult for economic operators, including investors, to take full advantage of the benefits of the internal market. Thus, Article 114 of the TFEU gives the EU the right to act since, in line with the problem definition outlined in section [3.2], the options that will be assessed by this impact assessment will aim at (1) addressing contract continuity issues that arise in the context of the very likely cessation of one of the most widely used EU critical benchmarks (LIBOR) by the end of December 2021; and (2) ensuring continued availability of spot foreign exchange rates for use in hedging tools issued in the European Union after the end of the BMR transition period in December 2021. More specifically, as to the first issue covered by this impact assessment, the lack in the BMR of mechanisms to accompany the FSB’s recommendations for reform (driver 1) and to mandate an interim rate to be published for tough legacy contracts (driver 2) combined with the heavy exposure of EU banks to USD LIBOR funding (driver 3) would be likely to result in heterogeneous implementing or legislative solutions by Member States whose financial institutions are largely impacted by the transition. This would create confusion among benchmark users and end-investors, resulting in disruptions to the internal market, preventing them from fully benefiting from the single market. Since the problems identified in section 3.1, resulting from the above mentioned drivers, affect the whole of EU, i.e. a vast number of European financial and non-financial companies using LIBOR, use of Article 114 is most appropriate to tackle these problems comprehensively and uniformly. Indeed, the identified problems require a robust system to transition from IBOR rates that can uniformly be relied on by companies in all Member State jurisdictions. Furthermore, as the current proposal seeks to amend the BMR in order to create a harmonised “orderly transition” regime critical benchmarks, it is appropriate to use the same legal basis for this harmonisation measure. Article 114 TFEU gives therefore the EU the legal basis to enhance the current regulation in order to address this fragmentation. In a similar manner, as to the second issue dealt with in this impact assessment, the requirement for European banks to offer only hedging tools that reference BMR compliant rates (drivers 1 and 2) along with the circumstance that certain foreign currency spot rates will not become compliant before the end of the transitional period (drivers 3 and 4) would result in problems identified in section 3.1.2; namely it would put at a competitive disadvantage both European banks offering derivatives as a hedge for currency exposure, and European companies that wish to hedge currency exposures via listed derivatives that can only do so if the currency spot rate which the derivative is intended to hedge is itself BMR compliant. The purpose of the action at EU level is in this case precisely to tackle the above mentioned problems by reducing the scope of the BMR and exempt specific foreign currency spot rates. This would ensure their continued use as an underlying for all EU based dealer banks and their corporate clients, thereby avoiding disruptions to the functioning of the internal market. As this action is aimed not to harm the competitiveness of certain EU stakeholders and the effectiveness of the financial system, for the Union economy, its citizens and businesses, article 114 TFEU is the appropriate legal base to achieve this coordinated deregulation objective. Therefore, the establishment of an EU mechanism to deal with legacy contracts and of an exemption regime to ensure of continued reference of foreign currencies spot rates would fall under the competence of the EU according to Article 114 of the Treaty of Functioning of the European Union (TFEU). 4.2Subsidiarity: Necessity of EU action According to the principle of subsidiarity (Article 5.3 of the TEU), action at EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU. While some benchmarks are national, the benchmark industry as a whole is international in both production and use. Issues concerning critical benchmarks as well the use of non-EU benchmarks have by definition a European dimension. Whereas LIBOR is administered and supervised in UK, it is widely used by EU banks as the interest rate for their USD funding currency calculates the US interbank lending market and clearly involve cross jurisdictional issues. Similarly, spot foreign exchange markets are global by nature and benchmarks in these sectors involve the same cross-jurisdictional issues. For such international benchmarks, purely national action could not effectively tackle the problems outlined above. The problems and their drivers, as identified in section [2], could possibly be addressed through individual action by Member States. As to the issue of the IBOR transition, they could intervene introducing legislation indicating the national replacement rate in contracts referencing the disappearing IBOR. Nevertheless, individual action by Member States is likely to only partially address the identified issues (notably because some Member States may legislate, while others would not). Furthermore, different approaches to the legacy contract issue across the Member States would introduce fragmentation in the single market. For example, if each Member State determined, through national statute, a different fall-back rate for USD LIBOR, competition in the banking sector might yield “winners and losers” on the basis of differences in the remuneration that banks would obtain for ex LIBOR loans. Competitive distortions could also arise because banks in different Member States would have different refinancing costs (as they vary according to the chosen ex LIBOR fall-back rate). Action at EU level as regards a harmonised orderly transition regime for critical benchmarks that works for legacy contracts across the Union is thus needed in order to ensure coherence and to further improve the functioning of the single market. More specifically, while action at national level in relation to national benchmarks may help ensure that any intervention is appropriately tailored to the problems, this may lead to a patchwork of divergent rules, could create an un-level playing field within the internal market and result in an inconsistent and un-coordinated approach. A patchwork of national rules would impede the opportunity to produce cross border benchmarks and therefore impede cross border transactions linked to them. In contrast, an EU initiative would help enhance the single market by creating a common framework for reliable and appropriately used benchmarks across different Member States. Equally, action at EU level is also needed for ensuring the continuous use of foreign currency spot rates as they are already covered by regulation adopted at European level (the BMR) and action at national level would not be sufficient to reach the aim. 4.3Subsidiarity: Added value of EU action The problems connected to the use of critical benchmarks have by definition a European dimension and EU action would reduce significantly the complexity, financial and administrative burdens for all key stakeholders (i.e. banks exposed in USD LIBOR or other disappearing IBOR) to renegotiating legacy contracts in order to insert a replacement rate. The purpose of the action at EU level is to protect the public interest against these problems by contributing to creating an effective and efficient regime for legacy contracts affected by the cessation of a critical benchmark ensuring contract continuity and financial stability for the Union economy, its citizens and businesses. Equally the use of non-EU benchmarks is a common feature for all jurisdictions of the EU and action at national level would create the risk of uncoordinated action in a core area of the capital markets. Such a result would be, as mentioned in the introduction, at odds with the aim of the CMU and the need to ensure optimal financing conditions for the European economy. Ensuring the use of certain foreign currency spot rates throughout Europe would bring clear benefits ensuring a level playing field among all supervised entities and business corporates at the same time.

5Objectives: What is to be achieved? 5.1Disorderly IBOR transition General objective: Ensure the highest possible degree of financial stability during the IBOR transition. Specific objectives: (I)Ensure legal certainty: ensure that all contracts pending when an IBOR rate is discontinued benefit form a successor rate, ensure legal certainty and avoid litigation risk for all financial and non-financial counterparts in contracts referencing the discontinued IBOR; (II)Allow for more efficient balance sheet management: ensure that all EU banks with LIBOR exposures on the asset and liability side of their balance sheets can manage legacy balance sheet exposures in a predictable manner; (III)Ensure contract continuity: allow for the highest degree of certainty that the legacy rate will actually be published during the designated period and allow for adaptations of time-lines in line with identified needs in ensuring specific objectives 1 and 2 above. (IV)Allow orderly wind-down of any critical benchmark: ensure that the toolkit provided can be used by competent authorities for any critical benchmark that needs to be wound down, including non-IBORs 5.2Loss of an EU-based risk management tool General objective: Maintain the highest possible degree of financial stability in foreign exchange hedging for both the EU financial and non-financial sectors Specific objectives (I)Maintain transparency in FX derivatives trading: create a rulebook that allows EU based derivative contracts that hedge foreign exchange risk to continue trading on regulated markets and avoid a migration of these contracts to less transparent over-the-counter (OTC) trading; (II)Maintain risk management for EU exporters and foreign direct investors: create a legal framework that allows EU exporters and foreign direct investors to continue to manage currency risk by means of EU based derivatives contracts; (III)Avoid EU banks’ undue exposure to currency risk: ensure that the new legal framework designed to allow EU investors to continue use hedging tools provided by EU banks limits the recourse to non-compliant rates to a clearly identified category of “monetary policy” rates so as to avoid undue exposure of banks’ balance sheets to currency risks. (IV)Maintain a level playing field for EU banks: ensure that EU banks are not placed at a competitive disadvantage in offering hedging tools to EU exporters and foreign direct investors when compared to non-EU competitors. 5.3Options to avoid a disorderly IBOR cessation In order to ensure the highest possible degree of financial stability for both the financial and non-financial sector in the course of an IBOR transition, this impact assessment analyses four options, three of which contain a temporary IBOR legacy rate and one which proposes a permanent replacement rate: Option 1: Create new powers in the BMR to enable the regulator which determines an IBOR rate to be no longer representative of an underlying market to mandate the publication of a temporary legacy rate to bridge the wind down of legacy contracts still pending at the point the original IBOR is deemed to be no longer representative (“mandating a temporary legacy rate”); Option 2: Create a new simplified authorisation procedure within the BMR to allow the regulator which deems an IBOR rate no longer representative of an underlying market to withdraw the authorisation of the IBOR and issue a simplified authorisation for a temporary legacy rate to allow for the wind-down of legacy contracts (“simplified authorisation for a temporary legacy rate”); Option 3: Create a new exemption from compliance with the BMR for a temporary legacy rate that will be published either by the private or the public sector when the competent regulator determines that an IBOR is no longer representative of an underlying market and withdraws the authorisation to publish the IBOR rate (“exemption for a temporary legacy rate”); and

Option 4: Create new powers in the BMR to enable the regulator which determines an IBOR rate to be no longer representative of an underlying market to mandate the publication of a permanent successor rate which can be used as a reference rate both in legacy and in new contracts (“mandating a permanent successor rate”). 5.4. Options for avoiding loss of EU-based risk management tools In order to maintain financial stability in foreign exchange hedging for both the EU financial and non-financial sectors, this impact assessment analyses four options: Option 1: Create new powers in the BMR to enable regulators to authorise individual hedging contracts that reference third country currency spot exchange rates that are not recognised or endorsed for use in the Union(“contract authorisation”); Option 2: Create a new statutory exemption in the BMR according to which foreign exchange hedging contracts are exempt from the requirement that contracts offered by EU dealers can only reference recognised or endorsed spot exchange rates (“contract exemption”); Option 3: Create a new statutory exemption in the BMR according to which third country foreign exchange spot rates do not need to be recognised or endorsed for use in the Union (“spot rate exemption”); and Option 4: Create a new statutory rule in the BMR whereby – in analogy to the designation of an index as a critical benchmark according to the current Article 20 BMR – the European Commission designates certain spot currency exchange rates as critical rates, with the consequence that all other third country spot exchange rates can be referenced in contracts in the Union without recognition or endorsement (“designation approach”). 6What is the baseline from which options are assessed? 6.1Disorderly IBOR transition Without any further intervention the most likely scenario (3.3.1) is that LIBOR ceases to exist without a legacy or replacement rate. EU banks and their clients would need to negotiate a replacement rate among themselves individually and then amend all their USD LIBOR contracts to embed this rate retroactively. This raises issues of feasibility and cost, both for corporate lenders and for their, often small and medium sized borrowers. For corporate lenders, as with USD LIBOR exposure data, data on the potential cost of renegotiation of USD LIBOR legacy contracts is not readily available and commercially sensitive. In terms of cost and complexity, the cash market (loans and debt) is more challenging than derivatives. In the latter, agreements may be covered by a standardised set of terms and can be amended via accepted protocols, generally concluded between more sophisticated counterparties who adhere to a common industry association (e.g., the International Swaps and Derivatives Association – ISDA). In the cash markets, the concept of a protocol does not exist. Counterparties have varying degrees of sophistication and individual negotiations are required for each agreement. One major bank has submitted confidential estimates with the immediate caveat that these figures do not reflect the full scope of the problem. In the debt and loan markets, there are thousands of contracts that their legal departments would need to renegotiate (because they mature after the end of 2021) and even if all the cost of renegotiation could be assumed, there are simply not enough hours available between now and December 2021 to successfully complete the renegotiation of all legacy contracts. In addition, efforts at renegotiation will not be successful until the relevant risk-free rate working groups have recommended generally accepted legacy rates for the contracts still pending when LIBOR is discontinued. The legal cost associated with renegotiating “tough legacy” contracts is expected to vary, driven by the following key variables: Complexity, client sophistication and lawyer time required. According to confidential estimates by a major corporate lender, renegotiating loan agreements with relatively more standardized terms (only derivatives use the standardized ISDA protocols) would likely cost, on average, EUR 55,000 per transaction, with variations depending on jurisdiction, governing laws and whether there are contractual securities involved or not. More complex and bespoke loan or debt re-negotiations could see costs rise significantly, possibly exceeding EUR 100,000 per transaction. Cost also increases if parties engage in extended negotiations, because of a lack of borrower or lender cooperation. On the basis of the contract volumes shared by several major and mid-tier banks on a confidential basis (see above, Section 3.1.1), the total cost or renegotiating the loan, debt and derivatives (incl. complex loans and debt) on these banks’ balance sheets would range between EUR 793 million (mid-tier institution) and EUR 3.47 billion (large institution). In order to estimate the cost burden on EU small business borrowers, we take into account the following factors. We know from our interviews that the lower range of the above cost estimates reflects a bank with a focus on private and small business customers. We conservatively estimate that the cost of renegotiation incumbent on the non-financial counterpart is only around 20% of the cost incurred by the bank. This would result in potential and estimated total cost per bank in the small business sector to the order of EUR 158.6 million for loans, debt and derivatives (incl. complex loans and debt).

We could further extrapolate the cost burden on the small business sector by taking the institution’s approximate domestic corporate lending market share (25%) to estimate that the small business sector in that (large) Member State would face an approximate burden of EUR 634.4 million if all small business in that Member State (and not just the example bank’s customers) would need to renegotiate their loans and debt arrangements. On the basis that this (large) Member State accounts for slightly less than one-third of the Eurozone GDP, the small business burden of renegotiating their USD LIBOR loans and debt arrangements in the Eurozone can be estimated at EUR 1.9 billion. 6.2Loss of EU-based risk management tools Without any further regulatory intervention, the most likely scenario (Section 3.3.2) is that EU exporters and investors would shift their currency hedges to less transparent and less regulated ‘over-the-counter’ contacts with non-EU banks. This has negative repercussions on EU exporters and investors, but the reduced EU-based non-deliverable forward trading volumes would also negatively affect the risk management efficiency of EU banks themselves. As we are unable to assess the precise cost of such a shift to over-the-counter instruments, the baseline will be presented as the values in foreign trade that are at risk if this shift is either (1) not successful; (2) very costly or (3) leads to losses due to less regulated forward contracts being used to hedge currency exposures. We do not expect EU companies’ exposures to leading Asian currencies to diminish over time (with the consequence that hedging these exposures to their volatility will become less relevant). If anything, as explained in Section 2.2, the turnover of emerging market currencies rose by almost 60% in the three years to 2019. The following indicators provide an impression of the trading and investment volumes at risk, if e.g., the USD/KRW or USD/IND exposures could no longer be hedged in an efficient manner: Korea India % change (Korea) EU exports of goods 49.6 billion 46 billion + 77% EU imports in goods 51.1 billion 46 billion EU exports of services 13.5 billion N/A EU imports of services 7.9 billion N/A EU inward foreign direct investment (FDI) 28.3 billion 11.0 billion + 112% EU out-ward FDI 51.3 billion 77.0 billion + 39% For EU banks, as explained in Section 2.2., the corporate client base of each EU bank offering currency hedges includes a mix of exporters and importers, enabling the bank to match buyers with sellers as efficiently as possible and so reduce the bank’s net exposure to the currency. Making currency spot exchange rates “unavailable” for use in the EU would have negative repercussions on the risk management for the EU banking sector as the possibility to offset position among a larger client base is lost. Preventing an EU bank from entering into forward contracts referencing a spot foreign currency exchange rate published by a private institution in the relevant jurisdiction would not only increase the exposure of its EU clients to currency collapses, as they would be unable to hedge these risks with an EU bank, but also prevent the bank to hedge its own currency exposures. For example, a European car manufacturer investing in a factory in Korea, would accrue exposure to the Korean won in terms of their initial investment and on-going local employee costs. A European bank may provide the car manufacturer with financing to purchase the factory. It therefore has risk of loss tied to the client’s currency exposures. If the bank takes security over the factory in order to provide the loan, the bank would take the factory onto its balance sheet in the event the car manufacturer defaults and therefore also take on the client’s exposure to Korean Won. Both the bank and the client need to be able to use the USD/KRW spot rate to enter into a currency forward or swap contract to hedge themselves from risk of losses from these exposures in this example. Prohibiting use of a currency spot rate would not negate the risk to the bank but instead leave it with unhedged risk. Non-deliverable forwards represent the most standardized liquid instrument for managing these currency exposures. Banks frequently trade in NDFs in order to: (1) execute trades for clients, (2) to enable clients to hedge their exposures denominated in the relevant currency; and (3) to hedge their own exposures denominated in the relevant currency. Where the bank is hedging its own exposures denominated in the relevant currency, the purpose of the NDF is to protect the bank against unfavourable changes in the exchange rate, including as a result of the collapse of the relevant currency. In this situation, preventing a bank from entering into forward contracts referencing a spot exchange rate published by a private institution would be more likely to increase the bank's exposure to currency collapses than to reduce it. Finally, in order to attempt to mitigate naturally occurring risks if the main benchmark is prohibited, it is more likely that banks and their clients attempt to use ‘proxy’ hedges. These are transactions which do not directly offset the source of the risk, but instead take a position in an exposure which, if historic correlation holds true, provides them with an approximate hedge. Unfortunately, correlations often break down and can leave institutions at risk of an unhedged loss on both their original exposure and on their proxy hedge. 7Description of the policy options 7.1Disorderly IBOR transition 7.1.1Features common to all options All of the options discussed in this impact assessment share a set of common design features. In brief, all of the options will:

(I)enable the competent authority to order the cessation of an IBOR rate that is no longer representative of an underlying market; and (II)entrust the competent authority with powers to decide what “accompanying measures”, if any, should be taken when it orders a critical benchmark to cease. Accompanying measures under (ii) depend on the policy option that would ultimately be selected, and include the following: mandating the conversion of the critical benchmark into a temporary legacy rate (Option 1); authorising a temporary legacy rate (Option 2); allowing for a legacy rate to be published under a statutory exemption (Option 3); or mandating conversion of the critical benchmark into a permanent successor rate (Option 4). In all of the options, the legacy rate is designed as a single rate applicable across all asset classes. All options share the following design features: Future-proofing. All of the individual policy options considered in the report are aim to establish the necessary mechanisms to accompany the orderly cessation of all critical benchmarks, not just IBORs. This requires a degree of ‘future-proofing’ in designing the options, both to cover all IBORs and any other critical benchmarks in the future. To achieve this, it is essential that the type of methodology change that governs the conversion of an IBOR into a legacy rate (Option 1), the methodology requirements that govern the authorisation of a legacy rate (Option 2), the methodology that underpins exempted legacy rates (Option 3); or the type of methodology change that governs the conversion of an IBOR into a permanent successor rate (Option 4) are not be “hard-wired” into legislation. This will allow the competent regulator to choose the required methodology changes to an existing IBOR (Options 1 and 4) or methodology requirements for a newly authorised legacy rate (Option 2) from the latest state of the art, when it is time to take the relevant decisions. Any choice for a conversion methodology will be made taking into account the work done by private sector alternative reference rate working groups operating under the auspices of the relevant central bank. Transparency and clarity of process. A further principle underpinning all of the retained options is that the market must be informed in advance on the stages of an IBOR conversion or cessation process. The options are structured along a common grid, designed to ensure that market participants understand both in advance, and at the time the powers are used, how the competent regulator will exercise its powers. All options will therefore comprise a number of procedural obligations designed to ensure transparency and clarity throughout the conversion or cessation process: (1) prior guidance; (2) one or several pre-conversion or pre-cessation notices; (3) public consultations. Prior guidance on the process. A common requirement would be that the competent regulator, prior to launching an IBOR pre-conversion or pre-cessation process, issues policy guidance on how the new powers will be exercised in advance of launching the pre-conversion or pre-cessation process. This guidance will have to set out how, and on the basis of which factors, the regulator will determine that an IBOR no longer represents the underlying market and how it will exercise its new BMR powers thereafter. For Options 1 and 4, the guidance should include a description of the types of methodology changes the competent authority might consider when mandating the conversion of an IBOR into a legacy or a permanent successor rate. For Option 2, the guidance would set out the factors and criteria to be considered in granting authorisation for a legacy rate. While the new BMR powers should not entail material constraints on the kind of methodology changes that the administrator may impose (as part of a conversion) or assess (as part of a new authorisation), there will be procedural requirements on the competent regulator to explain how it intends to exercise the new powers. Potentially two public “pre-conversion” or “pre-cessation” notices. All options would oblige the competent regulator to publish potentially two “pre-conversion” or “pre-cessation” notices. The first notice shall be published when the “representativeness” assessment of the IBOR rate is concluded with a negative result. In the first notice, the competent regulator will be required to give reasons for its decision to order the cessation of the IBOR and set out when representativeness is (was) lost. The regulators should also set out the remedial steps, if any, that it envisages for legacy contracts. The second notice shall be published when the “reconciliation phase” that follows the representativeness assessment is complete (see below). In the second notice, the regulator shall specify when its decision to either convert or cease the IBOR rate applies. In case the regulator requires a change of methodology for a legacy rate (Option 1) or a permanent replacement rate (Option 4), the second “pre-conversion notice” would also need to explain the changes made to the methodology and any other information on the conversion into a legacy (permanent successor) rate that would be beneficial to market users. This ensures that the new “conversion” powers are exercised in a transparent manner, taking into account the results of a public consultation. The aim is to allow potential users to adapt risk management systems and controls and assess all legal implications resulting from the conversion. Public consultation prior to conversion/authorisation of legacy or successor rates. For the option that includes mandated conversion of an IBOR into a legacy rate (Option 1) or a permanent successor rate (Option 4), there will be an obligation on the competent regulator to consult, given that market participants need to assess whether the proposed methodology changes to the IBOR rate require changes in their risk positions and operations, and whether they have any potential contractual and legal impacts. For Option 2, the administrator seeking authorisation would be obliged to carry out the consultation. In both cases, the consultation must be structured in sufficient detail for potential users to assess all operational and legal consequences inherent in the use of the proposed rate. Common procedure and timelines. In consequence, all options rely on a transparent and predictable IBOR “pre-conversion” (Option 1 and 4) or IBOR “pre-cessation” process (Options 2 and 3). In brief, the common process is organised as follows: Once the competent IBOR regulator determines that the IBOR’s representativeness cannot be restored and that the benchmark needs to either cease (Options 2 and 3) or be converted into a temporary legacy rate to cover the portfolio of contracts pending at that point (Option 1 only) or a permanent successor rate for all contracts that require a credit-sensitive rate (Option 4): Initial notice of pre-conversion/pre-cessation. The administrator would receive a notice of the date at which the decision to discontinue the IBOR (Options 2 and 3) or to replace the IBOR with a legacy rate (Option 1) or a permanent replacement rate (Option 4) would take effect. This date would be no later than the date at which the benchmark would become unrepresentative. Reconciliation process. The administrator would have a (four month) period in which to engage with the regulator on how to organise the cessation (Options 2 and 3) or the conversion of the non-representative benchmark into a legacy rate for pending legacy contracts (Option 1) or into a permanent successor rate for all contracts that require a credit-sensitive benchmark (Option 4). The required public consultations described above would form part of this four month period (“reconciliation process”). Definite notice of pre-conversion/pre-cessation. After completion of the reconciliation process, the regulator would publish a “pre-conversion/pre-cessation notice” specifying: (I)the date at which the IBOR conversion would take effect (Options 1 and 4) or the date at which the panel bank IBOR’s authorisation is withdrawn (Options 2 and 3); (II)the effective date for the legacy rate to be published under the mandated methodology (Options 1 and 4); as well as (III)the asset classes that can continue to reference the legacy rate and for how long they can do so. The pre-conversion notice would prohibit use of the legacy rate in new contracts, written after the IBOR cessation is announced (Options 1 and 4). Periodic review of the usage permissions. After the conversion of the IBOR into the legacy rate, the competent regulator (Option 1) would have the power to periodically review the “usage permissions” and the period of permitted use of the legacy rate. These reviews are specifically intended to put the maximum pressure on the market to continue to try to renegotiate existing LIBOR exposures. There would be no such usage monitoring or controls with Options 2 to 4. Non IBOR-specificity. Although the present proposal is intrinsically linked to the currently ongoing IBOR transition, especially the expected cessation of LIBOR, all options would also enable a competent authority to ensure an orderly transition away from any other critical benchmark, the representativeness of which can no longer be restored. This is the case

Now that the common features are established, the following chapters present the features that distinguish the four policy options, in terms of process, the methodology underpinning the legacy rate, jurisdiction neutrality, cross-border application and ensuring that no new contracts make use of a potential legacy rate: 7.1.2Option 1: Mandating IBOR conversion The pre-conversion process. Once the competent IBOR regulator determines that the IBOR’s representativeness cannot be restored and that the benchmark needs to be converted to a new methodology to cover the portfolio of contracts pending at that point, Option 1 would start a four stage process: (1) Initial notice of pre-conversion/pre-cessation; (2) Reconciliation (four months, the required public consultations described above would form part of this four month period); (3) Definite notice of pre-conversion specifying the effective date of the conversion and (4) Periodic review of the usage permissions. The conversion. Option 1 equips the competent regulator with a power that will enable it to impose a methodology change on an administrator of a critical benchmark that is not limited by the constraints of “representativeness”. The criteria for introducing a methodology change would be to safeguard the interests of market stability and consumer protection. The powers to mandate conversion of an IBOR are therefore designed as a “matter of last resort”, once and only when it is clear that the critical benchmark’s representativeness cannot be restored. Option 1 will confer a significant degree of discretion on the regu