COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE 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
Date: 2020-07-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: benchmarking, consumer protection, financial control, financial legislation, financial market, foreign exchange market, monetary relations, price index, third country

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   EUROPEAN COMMISSION  Brussels, 24.7.2020  SWD(2020) 143 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE 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) 142 final}  
 
 
Executive Summary Sheet (Max 2 pages) 

Impact assessment on the reform of the EU Benchmark Regulation (BMR) 

A. Need for action 

What is the problem and why is it a problem at EU level?  

First, the IA scrutinises the consequences of the lack in the BMR of regulatory powers to ensure a smooth 
transition  away  from  a  critical  benchmark  (in  this  instance,  the  London  Interbank  Offered  Rate  or 
“LIBOR” which is expected to cease by the end of 2021). The value of the stock of legacy contracts that 
will reference USD LIBOR at its cessation date is estimated in 8-12 trillion USD worldwide (much of it 
on the balance sheets of banks in all Member states). In the absence of a designated successor rate there is 
a high risk that those contracts may be frustrated. Second, the IA assesses the consequences of the BMR 
for  European  players  using  foreign  currency  spot  rates  to  protect  themselves  (hedge)  from  changes  in 
exchange rates. Given that many spot rates are expected not to meet BMR requirements for use in the EU, 
European banks will no longer offer hedging contracts linked to them to European exporters and investors. 

What should be achieved? 

The initiative aims to introduce: (i) new statutory BMR powers to enable benchmark regulators to mandate 
a time-limited replacement rate for a critical benchmark being wound down, such as LIBOR, to be used 
in existing contracts; (ii) a targeted exemption from BMR for certain currency spot rates. 

What is the value added of action at the EU level (subsidiarity)?  

Banks in all EU Member States have contracts referencing critical benchmarks on their balance sheets. 
Action  at  Member  State  level  would  require  national  legislators  to  agree  on  a  single  and  uniform 
replacement rate. Action at national level would not be sufficient to ensure the continuous use of foreign 
currency spot rates as such rates are already covered by regulation adopted at EU level (BMR). 

B. Solutions 

What are the various options to achieve the objectives? Is there a preferred option or not? If not, 
why? 

The preferred option for critical benchmarks is to mandate the administrator of a disappearing rate with 
the  publication  of  a  time-limited  replacement  rate  for  all  references  in  contracts  maturing  after  the 
cessation date. Another option would be to leave the design of a successor rate to the market and provide 
for a simplified authorisation for such a rate. A third option would be to exempt any privately designed 
successor  rate  for  a  limited  period  from  BMR  compliance.  A  fourth  option  would  be  to  mandate  a 
permanent successor rate that would serve both  for existing and new contracts. The preferred option for 
allowing continuous use of currency spot rates is to exempt certain Commission-designated public policy 
rates  from  the  BMR.  Another  option  is  to  grant  the  Commission  the  power  to  designate  “critical”  third 
country  rates  (to  be  subject  to  BMR  rules).  Two  more  options  would,  respectively,  authorise  or  exempt 
from BMR derivative contracts referencing rates entered for hedging from currency risk. 

What are different stakeholders' views? Who supports which option?  

European banks fear that, in the absence of a single successor rate of a phased-out critical benchmark, 
contract  counterparts  will  cease  payments,  e.g.,  on  their  loans  (contract  frustration).  In  a  worst-case 

 
 
scenario, banks fear that counterparts will simply terminate the contracts. Benchmark administrators are 
reticent  to  publish  a  successor  rate  for  a  phased-out  critical  benchmark  of  their  own  volition.  They  fear 
that  without  a  regulatory  mandate,  the  switch  to  such  a  successor  rate  might  become  the  subject  of 
litigation.  European  users  of  currency  rates  have  shown  support  for  the  exemption  of  currency  spot 
rates from the scope of the BMR. They would also be favourable to having a designation approach.  

C. Impacts of the preferred option 

What are the benefits of the preferred option (if any, otherwise of main ones)?                                     

The preferred option scores best in providing contract continuity and avoiding contract frustration or early 
termination.  A  time-limited  “legacy”  rate  instantly  replaces  the  discontinued  LIBOR  rate,  and  bears  the 
exact  same  trade  name.  All  other  options  would  not  automatically  replace  all  contractual  references  to 
LIBOR. Equally, the preferred option for currency spot rate scores best in terms of allowing to continue 
hedging corporates’ exchange rate exposure and of efficiency and coherence of the regulatory regime.  

What are the costs of the preferred option (if any, otherwise of main ones)?                                    

The preferred option for critical benchmarks is cost efficient as the successor rate would be mandated by 
the competent authority by reference to a rate assembled based on a risk free rate that is published by the 
US Federal Reserve. The license fee for such a formula-based legacy rate is expected to be low. Also in 
the case of currency spot rates, the choice of a general policy rate exemption would not bring about costs 
for European entities, as they would not need to apply for any authorisation or seek ad hoc exemption. 

What are the impacts on SMEs and competitiveness?  

LIBOR  plays  a  crucial  role  in  SME  financing.  The  disappearance  of  LIBOR  without  an  appropriate 
successor rate would cause legal uncertainty. Equally, SMEs do business in third countries and they need 
to  continue  hedge  their  business  with  European  counterparties.  Non-action  would  be  highly  detrimental 
for SME businesses, especially when the COVID 19 crisis is putting at risk their very survival. 

Will there be significant impacts on national budgets and administrations?  

There will be no impact. Supervision of legacy rates and non-EU policy rates will be less resource-intense 

Will there be other significant impacts?  

The changes would also address potential cessation of critical benchmarks in the future (e.g. EURIBOR). 

Proportionality?  

The intended intervention is the minimum necessary to ensure contract robustness beyond the cessation of 
LIBOR and currency spot rates usage. All alternatives would be more complex. 

D. Follow up 

When will the policy be reviewed?  

The legacy rate will be published for 5 years. After that period, the regulator will assess whether the stock 
of  legacy  contracts  has  been  reduced  to  an  extent  that  allows  cessation  of  the  rate.  The  policy  rate 
exemption  will  be  reviewed  every  5  years,  as  required  by  BMR.  It  will  be  assessed  whether  EU-based 
derivative contracts are suitable as hedging tools for EU businesses’ exchange rate exposures.