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
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

EN 

  EN 

   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 ............................................................... 6 

1.1  Critical benchmarks: political context ............................................................... 7 
1.2  Critical benchmarks: legal context .................................................................... 8 
1.3  Foreign exchange rates: political context .......................................................... 8 
1.4.  Foreign exchange rates: legal context ............................................................... 9 

2 

BACKGROUND ................................................................................................................................ 10 

2.1  The Interbank Offered Rates (“IBORs”) ......................................................... 10 
2.2  Foreign exchange rates .................................................................................... 11 

3 

PROBLEM DEFINITION .................................................................................................................. 15 

3.1  What are the problems? ................................................................................... 16 
3.2  What are the problem drivers? ........................................................................ 22 
3.3  How will the problem evolve? ........................................................................ 24 

4  WHY SHOULD THE EU ACT? ........................................................................................................ 25 

4.1  Legal basis ....................................................................................................... 25 
4.2  Subsidiarity: Necessity of EU action ............................................................... 26 
4.3  Subsidiarity: Added value of EU action .......................................................... 27 

5 

OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 28 

5.1  Disorderly IBOR transition ............................................................................. 28 
5.2  Loss of an EU-based risk management tool .................................................... 28 
5.3  Options to avoid a disorderly IBOR cessation ................................................ 29 
5.4.  Options for avoiding loss of EU-based risk management tools ...................... 29 

6  WHAT IS THE BASELINE FROM WHICH OPTIONS ARE ASSESSED? .................................... 30 

6.1  Disorderly IBOR transition ............................................................................. 30 
6.2  Loss of EU-based risk management tools ....................................................... 31 

7 

DESCRIPTION OF THE POLICY OPTIONS ................................................................................... 33 

7.1  Disorderly IBOR transition ............................................................................. 33 
7.2  Loss of EU-based risk management tools ....................................................... 41 

8 

OPTION DISCARDED AT AN EARLY STAGE ............................................................................. 44 

8.1  Disorderly IBOR transition ............................................................................. 44 
8.2  Loss of an EU-based management tool ........................................................... 45 

9  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 46 

9.1  Disorderly IBOR transition ............................................................................. 46 
9.2  Loss of an EU-based risk management tool .................................................... 49 

9 

IMPACTS PER CATEGORY OF STAKEHOLDER ........................................................................ 51 

10.1  Disorderly IBOR transition ............................................................................. 51 
10.2  Loss of EU-based risk management tools ....................................................... 63 

11  HOW DO THE OPTIONS COMPARE? ............................................................................................ 66 

11.1  Disorderly IBOR transition ............................................................................. 66 

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11.2  Loss of EU-based risk-management tools ....................................................... 68 
11.3  Preferred option ............................................................................................... 69 

12  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? .................................. 69 

12.1  Orderly IBOR transition .................................................................................. 69 
12.2  Loss of an EU-based risk management tool .................................................... 71 

ANNEX 1: PROCEDURAL INFORMATION ............................................................................................ 72 

1.1  Lead DG, Decide Planning/CWP references ................................................... 72 
1.2  Organisation and timing .................................................................................. 72 
1.3  Consultation of the RSB .................................................................................. 72 
1.4  Evidence, sources and quality ......................................................................... 74 

ANNEX 2: STAKEHOLDER CONSULTATIONS .................................................................................... 82 

2.1 Workshop ............................................................................................................ 82 
2.2. Feedback statement of the Inception Impact Assessment relating to the 

review of the Benchmark Regulation .............................................................. 84 
2.3 Public consultation .............................................................................................. 87 

ANNEX 3: WHO IS AFFECTED AND HOW? ........................................................................................ 100 

3.1  Practical implications of the initiative ........................................................... 100 
3.2 Summary of costs and benefits .......................................................................... 104 

ANNEX 4: BACKGROUND INFORMATION ........................................................................................ 109 

ANNEX 5: CONFIDENTIAL ANNEX ..................................................................................................... 117 

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List of tables 

Table 1 – Bid-offer spreads, and their percentage changes for four Asian currencies .................. 22 
Table 2 – EU trade relationships with Korea and India (data in € billion) .................................... 31 
Table 3 – Summary of the main features of the four policy options – IBOR ............................... 41 
Table 4 – Summary of the main features of the four policy options – risk management tool ...... 44 
Table 5 – Comparison of the IBOR options .................................................................................. 67 
Table 6 – Comparison of the 3rd country options ......................................................................... 68 
Table 7 – Monitoring and evaluation – orderly IBOR transition .................................................. 69 
Table 8 – Monitoring and evaluation – loss of an EU-based risk management tool ..................... 71 
Table 9 – Business loan exposure to USD LIBOR across maturity ranges. ............................... 100 
Table 10 – EU banks’ wholesale funding sources....................................................................... 101 
Table 11 – Break down of derivatives exposures ........................................................................ 102 
Table 12 – Overview of identified alternative RFRs in the five LIBOR currency areas ............ 109 
Table 13 – Notional IBOR exposures by currency and asset class (in EUR) ............................. 110 

 List of figures 

Figure 1 – Difference in hedged liabilities pre and post USD LIBOR cessation .......................... 19 
Figure 2 - $12 Trillion Problem (USD trillion) ............................................................................. 20 
Figure 3 – Respondent’s main activity in relation to benchmarks ................................................ 88 
Figure 4 – Activity sector of respondent (more than one answer allowed) ................................... 88 
Figure 5 – Location of respondents ............................................................................................... 89 
Figure 6 – Notional IBOR exposures by currency (in EUR trillion) ........................................... 110 
Figure 7 – Breakdown of data sources used in the determination of USD LIBOR..................... 112 
Figure 8 – Transaction volume (monthly) underpinning the determination of EURIBOR for 
different tenors (January 2020) ................................................................................................... 113 

Glossary 

Term or acronym 

Meaning or definition 

€STR 

ARRC 

BBA 

BMR 

Euro Short Term Rate 

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).  

British Bankers' Association 

EU Benchmark Regulation (Regulation (EU) 2016/1011) 

4 

 
 
 
BMR 

CMU 

CCPs 

Critical benchmark 

ECB 

EMMI 

EMTA 

ESMA 

Regulation (EU) 2016/1011 (the Regulation / the (EU) Benchmark 
Regulation) 

Capital Markets Union 

Central Counterparties 

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) 

European Central Bank 

European Money Markets Institute (the  administrator of 
EURIBOR) 

Emerging Markets Trade Association 

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 

FSB 

FSB OSSG 

FSMA 

FICC 

FX 

GCF 

IBA 

ICE 

IBOR 

ICMA 

Financial Conduct Authority (the UK competent authority for 
securities and markets) 

Financial Stability Board, an international organisation comprising 
high-ranking officials from central banks, national treasuries and 
securities markets regulators 

FSB Official Sector Steering Group on Benchmark reform 

Financial Services and Markets Authority (the Belgian competent 
authority for securities and markets) 

Fixed Income Clearing Corporation 

Foreign Exchange 

General Collateral Financing 

ICE Benchmark Administration (the current administrator of 
LIBOR) 

InterContinental Exchange 

InterBank Offered Rate 

International Capital Market Association 

Interbank (money) market 

The market of loans and deposits between banks for maturities 
ranging from overnight to one year 

ISDA 

LIBOR 

LMA 

MMSR 

NDF 

International Swaps and Derivatives Association  

London Interbank Offered Rate 

Loan Market Association 

Money Market Statistical Reporting 

Non-Deliverable Forward contract 

5 

 
 
OTC  

RFR 

SI 

Over The Counter. Refers to products that are not traded on trading 
venues, but between an investment bank and a corporate 
counterparty. 

Risk-Free Rate 

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 

UCITS 

USD 

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 

Undertakings for Collective Investment in Transferable Securities 

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  20181.  The  transitional  regime2  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 Article 59(1) of the BMR. 
2 Article 51(5) of the BMR. 

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1.1 Critical 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  benchmarks3.  In  2014,  the  FSB  published  a  report4  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)5. 
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 

3 https://www.fsb.org/2014/07/pr_140722/  
4 FSB, 2014, Reforming Major Interest Rate Benchmarks 
5  The  risk-free  rate  is  the  theoretical  rate  of  return  of  an  investment  that  carries  zero  or  negligible  risk 
(usually  this  is  identified  in  overnight  rates),  it  is  the  minimum  return  that  an  investor  expects  from  an 
investment that include a risk component. And as such, the risk-free rate also acts as a benchmark for other 
interest rates. Typically, overnight rate are considered as risk-free or nearly risk-free.  

7 

 
 
                                                           
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. 

1.2 

Critical 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 billion6. 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 calculated7 
and  in  the  way  that  data  used  to  calculate  it  is  collected8.  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 reflect9.  

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)10. The competent 
authority  also  has  the  power  to  require  banks  participating  to  a  panel  to  continue 
contributing  data  (mandatory  contribution)11.  Another  tool  to  preserve  a  critical 
benchmark are the rules on transition of a critical benchmark to a new administrator. 

the  cessation  of  a  critical  benchmark,  e.g.,  due 

However, the BMR does not contain provisions aimed at addressing how to manage the 
consequences  of 
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. 

1.3 Foreign 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 

6 Article 20 and Recitals 35 and 36 of the Benchmark Regulation. 
7 Article 23(6) (c) of the Benchmark Regulation. 
8 Article 23(6) (c) of the Benchmark Regulation. 
9 Article 23 (6)(d) of the Benchmark Regulation. 
10 Article 21 and Recital 37 of the Benchmark Regulation. 
11 Article 23 and Recital 39 of the Benchmark Regulation. 

8 

 
 
                                                           
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)12  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 counterparty13. 

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 Regulation14, 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. 

12 Which are considered as financial instruments due to the reference the definition pursuant to Article 
2(1)(16) which refer to the definition contained in Directive 2014/65/EU (MiFID II). 
13 A supervised entity pursuant to the definition in Article 3(1)(7)(b) BMR. Note also that it is only the 
dealer bank offering the derivative instrument which is considered to be using the benchmark, not the 
corporate end client seeking to hedge its foreign exchange exposure.  
14 This holds for the original impact assessment (SWD(2013) 336 final), as well as for the Proposal for the 
Benchmark Regulation (COM/2013/0641 final). 

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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. 

2  BACKGROUND 

2.1 The 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 2021.15  

LIBOR.  LIBOR16, 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  trillion17  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. 

15 The other critical benchmarks are EURIBOR, EONIA, the Stockholm Interbank Offered Rate (STIBOR) 
and the Warsaw Interbank Offered Rate (WIBOR). 
16 LIBOR is calculated in five currencies (GBP, USD, EUR, JPY and CHF) for tenors ranging from 1 day 
to 12 months. 
17 Andreas Schrimpf and Vladyslav Sushko, BIS Quarterly Review, 05 March 2019. 

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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  trillion18, 
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).  

2.2 Foreign 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 funds19.  

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 

18 Molitor, Philippe, ECB, 2018, Update on quantitative mapping exercise. 
19 Figures supplied to DG FISMA staff in interviews with the Global FX Division - Asia Pacific of the Global 
Financial Markets Association (GFMA). 

11 

 
 
                                                           
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)20.  

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 

20 According to a member survey by GFMA’s Global FX Division (representing around 80% of the global 
inter-dealer market). 

12 

 
 
                                                           
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; 

13 

 
 
(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.   

14 

 
 
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). 

3  PROBLEM 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  

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 

D3. (out of scope). The 
EU financial sector is 
heavily dependent on 
certain IBOR rates, e.g., 
they have considerable 

  P1. The European Union will not have in 
place  a  robust  system  to  transition  from 
risk-free  or  other 
IBOR 
rates 
IBOR 
internationally 
replacement rates. 

recommended 

to 

  C1.  Absence  of  a  robust  transition 
framework will result in a competitive 
disadvantage  for  European  companies 
and the European financial sector 

  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. 

and 

  C2.  Litigation  around  the  issue  of 
“contract  frustration”  will  consume 
considerable 
effort, 
time 
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  

  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 

15 

 
 
 
 
exposures to USD 
LIBOR maturing after 
2021 

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  

transparent 

  C1. Over-the-counter products are less 
listed 
risk 
more 

price 
derivatives,  making  currency 
(volatility) 
expensive 

management 

than 

D2.  The  BMR  only 
covers  EU 
investment 
banks  that  offer  foreign 
exchange derivatives  

D3. (out of scope). There 
spot 
are  no  onshore 
markets for many foreign 
currencies 

  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 
listed 
the  more 
offer 
products to EU companies 

transparent 

  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) 

3.1 What are the problems? 

3.1.1 

IBOR 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 202121. 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 
meet22. 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 

21 https://www.fca.org.uk/news/speeches/the-future-of-libor  
22 https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans; While panel 
banks remain free to continue submitting transaction or quotation data to IBA, on a voluntary basis, from 
January 2022 onwards, no regulatory intervention would compel them to do so. Therefore, panel banks 
might prefer to cease contributions as participation in a panel bank rate entails compliance costs as well as 
conduct and reputational risk. 

16 

 
 
                                                           
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 
discontinued23.  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  costs24.  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  funding25.  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  disappears26. 
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 LIBOR27.  

23 See annex 3.1.5 for an overview of the legal considerations. 
24 Andreas Schrimpf and Vladyslav Sushko, BIS Quarterly Review, 05 March 2019 
25 Andreas Schrimpf and Vladyslav Sushko, BIS Quarterly Review, 05 March 2019 
26 Risk.net, 7 Feb 2020, Secrets and Libor fallbacks 
27 The Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the 
Comptroller of the Currency and the U.S. Department of the Treasury met with representatives of a number 
of  U.S.  regional  banks  on  February  25,  2020  to  discuss  ways  to  support  the  transition  of  loan  products 
away from LIBOR, including by holding a series of working sessions. Following up on this meeting, Credit 
Sensitivity Group workshops will be hosted by the New York Fed to further discuss these issues. They will 
also  explore  methodologies  to  develop  a  robust  lending  framework  that  considers  a  credit  sensitive  rate 
element in the lending markets as a supplement to SOFR. 
See https://www.newyorkfed.org/newsevents/events/markets/2020/0225-2020.  

17 

 
 
                                                           
Private sector benchmark aiming to create credit-sensitive rates have emerged recently28. 
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. 

28 Risk.net, 12 May 2020, Markit plans SOFR credit spread add-on using CDS data 

18 

 
 
                                                           
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).  

Figure 1 – Difference in hedged liabilities pre and post USD LIBOR cessation  

10% 

40% 

100%

80%

60%

40%

20%

0%

EU pre

US pre

EU post

US post

deposits

FX swaps

term debt money markets

equity

unhedged

Source: DG FISMA calculations 
Note:  The  bars  represent  the  hedged  liabilities  of  a  stylised  EU  wholesale  bank  and  US  deposit  taking 
bank. While the composition of the liabilities is different for both banks, both are able to 100% cover the 
risk  on  (hedge)  their  liabilities  pre-USD  LIBOR  cessation  (EU  pre  and  US  pre).  Post-USD  LIBOR 
cessation, the EU wholesale bank cannot hedge its FX swaps (20% of its liabilities) nor the money market 
funds (20% of its liabilities) (EU post). The US deposit taking bank has much higher deposits and has only 
the money market funds (10% of its liabilities) that are unhedged (US post). 

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.  

19 

 
 
 
Figure 2 - $12 Trillion Problem (USD trillion) 

3

2

1

0

2020

2021

2022

2023

2024

2025

2026

2027
onwards

Source: Bloomberg 
Note: Bulk of global outstanding loans are due after LIBOR’s 2021 demise 

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 
202829. 

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.  

3.1.2  Foreign 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 

29 ICMA paper for the GBP risk-free working group, figures assembled by RCB Capital Markets, October 
2018 

20 

 
 
 
                                                           
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 FISMA30, 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 directly31 (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)  

30 ISDA response to the public consultation ‘Review of the EU Benchmark Regulation’. 
31 This is the case of Thai Bath and Malaysian Ringgit where the central banks administer the local spot FX 
market. 

21 

 
 
                                                           
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.32This 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. 

Table 1 – Bid-offer spreads, and their percentage changes for four Asian currencies 

Trade 
size 
USD 
mio 

Trade 
Tenor 

20 

40 

60 

1m 
3m 
1m 
3m 
1m 
3m 

Source:  

USDTWD 

USDIND 

USDKRW 

USDPHP 

Pre 

Post 
1.5 
2 
1.5  2.25 
3.5 
2.5 
4 
2.5 
3.25  4.75 
5.5 
3.72 

Pre 

% 
change 
33% 
50%  2.245 
40% 
60% 
46% 
47% 

Post 
1.5  2.75 
3.5 
3  4.25 
5 
5 
5.5 

3.5 
3.5 
4 

% 
change  Pre 

Post 
83% 
0.3  0.75 
56%  0.35  0.85 
42% 
1 
0.5 
0.6  1.15 
43% 
43%  0.65  1.25 
1.5 
38%  0.75 

% 
change  Pre 

Post 
5 
150% 
5.5 
143% 
6.5 
100% 
7.5 
92% 
92% 
8 
100%  6.25  9.75 

3 
3.5 
4.5 
5 
5.5 

% 
change 
67% 
57% 
44% 
50% 
45% 
56% 

3.2 What are the problem drivers? 

3.2.1  Legacy 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 

32 Derivatives trades are in scope of the BMR as soon as the instrument is traded on a multilateral trading 
facility (MTFs) or through an investment bank in the Union. MTFs in the EU27 include NEX 
(Amsterdam), Refinitiv (FXall, Dublin) and 360 T (Frankfurt).  

22 

 
 
                                                           
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) deposits33. This driver does not 
result from either the BMR or from its implementation, hence it is referred to as an “out-
of-scope” driver. 

3.2.2  The 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 
self-regulatory  organisations,  exchanges  or 
banks  or  central  bank  backed 
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.  

33  In  contrast  to  US  banks,  European  banks  cannot  use  the  US  onshore  deposits  of  their  US  branches  or 
subsidiaries  for  international  lending  activities  because  of  the  rules  on  intermediate  holding  companies. 
These rules require that the intermediate  holding company keeps the dollar deposits it collects in the  US 
onshore.  Banks  with  US  intermediate  holding  companies  are,  in  consequence,  dependent  on  borrowing 
USD in wholesale markets or via currency basis swaps with US banks (see Annex 3.1.3 for an overview of 
EU banks funding sources). 

23 

 
 
                                                           
3.3 How will the problem evolve? 

3.3.1  Legacy 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”. 

3.3.2  Loss 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) 

24 

 
 
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.  

4  WHY SHOULD THE EU ACT? 

4.1 Legal 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 
25 

 
 
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). 

4.2 Subsidiarity: 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 

26 

 
 
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.  

4.3 Subsidiarity: 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 

27 

 
 
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. 

5  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

5.1 Disorderly 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 

5.2 

Loss 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 

28 

 
 
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. 

5.3  Options 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 

29 

 
 
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”). 

6  WHAT IS THE BASELINE FROM WHICH OPTIONS ARE ASSESSED? 

6.1 Disorderly 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  contracts34.  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.  

34 In terms of magnitude, this concerns for a large bank ten thousands of loan contracts, hundreds of debt 
contracts and ten thousands of derivative contracts. 

30 

 
 
 
  
                                                           
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. 

6.2 Loss 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:  

Table 2 – EU trade relationships with Korea and India (data in € billion) 

EU exports of goods  
EU imports in goods 
EU exports of services 

Korea 

India 

49.6 billion  
51.1 billion 
13.5 billion  N/A 

46 billion  
46 billion 

% change 
(Korea) 
+ 77% 

31 

 
 
 
 
 
 
 
 
 
EU imports of services  
EU inward foreign direct investment (FDI)  
EU out-ward FDI  

7.9 billion 
28.3 billion 
51.3 billion 

N/A 
11.0 billion 
77.0 billion 

+ 112% 
+ 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.  

32 

 
 
 
 
7  DESCRIPTION OF THE POLICY OPTIONS 

7.1 Disorderly IBOR transition  

7.1.1  Features 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 

33 

 
 
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): 

34 

 
 
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: 

7.1.2  Option 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.  

35 

 
 
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  regulator,  e.g.  in  terms  of  the  type  of  methodology  change 
that  the  competent  regulator  can  impose  or  the  factors  the  regulator  must  take  into 
account in reaching a decision on the features of the converted rate. This is because the 
impact assessment concludes (Section 3.1.1.c.) that it is unrealistic, for the legislator, to 
be  able  to  determine  what  the  precise  methodology  change  should  be,  when  the 
emergence  of  adequate,  liquid  risk-free  rates  is  still  uncertain,  market  conditions  may 
change  and  agreement on a credit spread to  be added to  an underlying risk free rate to 
reflect the IBOR’s credit-sensitivity is not yet reached.  

However,  while  giving  sufficient  flexibility  to  the  competent  authority  to  mandate  the 
most appropriate methodology change, the new conversion powers would be constrained 
by the requirement for the regulator to take into account recommendations on alternative 
benchmarks  adopted  by  private  sector  working  groups  operating  under  the  auspices  of 
the  relevant  central  bank.  As  regards  the  IBOR  transition,  these  working  groups  are 
tasked with identifying and recommending risk-free rates that will replace current IBOR-
based benchmarks, also for the purpose of integrating those rates as fall-backs in existing 
contracts  that  reference  IBORs.  Since  these  recommendations  will  represent  industry 
consensus on the most appropriate alternative rate, they will act as an aid and a constraint 
to  the  competent  authorities  choosing  the  most  appropriate  methodology  for  the  wind-
down  of  a  critical  benchmark.  The  need  for  the  regulator  to  align  itself  with  the 
recommendations  of  private  sector  groups  is  further  highlighted  by  the  need  to  ensure 
consistency of alternative rates between tough legacy contracts and those covered by the 
work  of  private  sector  groups,  among  others  to  preserve  the  efficiency  of  hedging 
relationships spanning different contracts and asset classes.  

The future powers governing conversion of an IBOR are designed to encourage parties to 
legacy  contracts  to  accept  the  converted  rate  as  automatically  “flowing  through”  into 
their  legacy  contracts.  For  this  reason,  the  IBOR  conversion  powers  are  designed  to 
ensure that the converted rate remains the same IBOR benchmark, with the same name, 
produced by the same administrator. After publication of the “pre-conversion” notice, the 
benchmark can be adjusted to its new methodology and should continue to be published 
as  the  critical  benchmark  such  that  it  can  ‘flow  through’  to  contracts  referencing  the 
benchmark that have not been renegotiated to fall back to an alternative rate. It is not a 
permanent  successor  rate  (see  anti-circumvention  provisions  below).  As  regards  the 
IBOR transition, these working groups are tasked with identifying and recommend risk-
free  rates  that  could  serve  as  an  alternative  to  current  IBOR  benchmarks,  also  for  the 
purpose of integrating those rates as fall-backs in existing contracts that reference IBOR. 
Since these recommendations will represent industry consensus on the most appropriate 
alternative  rate,  they  will  act  as  an  important  consideration  impacting  competent 
authority’s discretion in designating the most suitable replacement rate. 

Jurisdiction neutrality. Option 1 would avoid the need to create complex statutory fall-
back  provisions  for  IBOR  legacy  contracts  in  the  different  jurisdictions  which  govern 
most of the pending USD LIBOR exposures (mostly, but not limited to NY, English and 
French laws). The ability for a competent authority to mandate conversion of the IBOR 

36 

 
 
rate would ensure that there is no change in the reference rate (the “flow through” avoids 
the need to replace the reference rate in each individual contract).  As Option 1 removes 
the need to renegotiate individual contracts, it is applicable irrespective of the applicable 
law governing the contract (“jurisdiction neutral”).  

Cross-border  application.  A  further  concern,  applicable  to  LIBOR  only,  is  that  the 
converted  rate  would  need  to  benefit  financial  and  non-financial  contract  parties  in  the 
EU27,  irrespective  of  which  authority  mandates  the  IBOR  conversion.  Option  1  would 
address this matter in the following way:  

(i)  Sub-option 1: the UK Financial Conduct Authority (FCA) will use its new BMR 
powers to mandate a USD LIBOR conversion on or around January 2022, when 
the UK is no longer in the single market35. At that stage (the UK is expected to 
depart the single market at the end of 2020), the use of the converted rate would 
be allowed in the Union either by way of recognition or endorsement. According 
to the BMR36, the authority competent for recognising any third country rate will 
be ESMA. The competent authority for approving an endorsement for use in the 
Union would be the competent regulator of the endorsing entity.   

(ii) Sub-option  2:  In  case  the  UK  Financial  Conduct  Authority  decided  not  to 
mandate  conversion  of  LIBOR  (or  would  not  be  vested  with  the  appropriate 
powers, e.g., due delays in adoption of the amended BMR beyond the end of the 
transition  period in  December 2020), the  reformed BMR would empower, as  of 
January  2022,  ESMA 
to  mandate  conversion  of  LIBOR  (the  LIBOR 
administrator has an EU entity).  

“No  new  flow”  provisions.  Option  1  would  also  address  the  need  to  ensure  that  the 
designated converted rate is not used by market participants beyond its intended purpose. 
Option 1 provides the competent regulator with powers to ensure that market participants 
do  not  increase  exposures  to  the  legacy  rate  after  the  previous  version  of  the  IBOR  is 
discontinued.  

In order to ensure that the converted IBOR rate is not used by supervised entities (e.g., 
EU banks) to generate new exposures after the change in methodology (for example by 
the  creation  of  new  loan  or  debt  agreements  that  reference  the  IBOR  legacy  rate),  the 
following safeguards will apply:  Supervised entities in  the EU are allowed to  reference 
the converted rate solely to (1) manage or reduce their legacy exposures to the IBOR rate 
or to (2) facilitate their clients’ management or reduction of their legacy exposures to the 
IBOR rate. In consequence, supervised entities in the EU would be permitted to use the 
converted IBOR rate to: 

(i)  continue  to  receive  performance  of  their  rights  and  to  comply  with  their 

obligations under agreements existing on “conversion date”;  

(ii) terminate  their  legacy  transactions  or  use  the  legacy  rate  to  calculate  the 

termination amounts payable; 

35 The supportive reply received by the FCA to the roadmap published by the European Commission 
suggests this could be the most likely option: https://ec.europa.eu/info/law/better-regulation/have-your-
say/initiatives/12268-Review-of-the-Benchmark-Regulation/F512186  
36 Article 40 BMR. 

37 

 
 
                                                           
(iii)value  their  positions,  e.g.,  to  margin  them  or  calculate  any  capital  requirements 

attributable to them,   

(iv) reduce their legacy exposures; and  

(v) facilitate their clients’ reduction of their legacy portfolios. 

Use  of  the  converted  rate  to  continue  to  service  contracts  (point  1)  and  to  reduce  bank 
and client legacy exposures (points 4 and 5) could comprise new transactions to enable a 
party  to  transition  a  legacy  contract  to  an  alternative  benchmark  or  to  service,  hedge, 
reduce  or  close-out  existing  exposures37.  Reducing  legacy  exposures  may  require 
allowing  client-facing  supervised  entities  such  as  central  counterparties  and  market 
makers to reference the legacy rate so that their clients can close out existing exposures. 

7.1.3  Option 2: Simplified authorisation for a temporary legacy rate 

The  pre-cessation  process.  Once  the  competent  IBOR  regulator  determines  that  the 
IBOR’s  representativeness  cannot  be  restored  and  that  the  benchmark  needs  to  cease, 
Option  2  would  start  a  three  stage  process:  (1)  Initial  notice  of  pre-conversion/pre-
cessation;  (2)  Reconciliation  (four  months);  (3)  Definite  notice  of  pre-conversion/pre-
cessation  announcing  the  precise  date  of  the  IBOR’s  cessation  (withdrawal  of 
authorisation). With option 2, there may or may not be an authorisation of a legacy rate, 
the  competent  regulator  has  no  influence  on  its  availability  or  the  timelines  for  its 
publication.  

The legacy rate. The legacy rate would be authorised by a simplified procedure and the 
authorisation  of  the  successor  rate  would  be  temporary.  Contrary  to  option  1,  the 
principle of “same administrator, same name” would not apply. It would be left to private 
market participants to design a rate that reflects the credit-sensitive features of an IBOR 
and the administrator would need to convince the competent regulator that the successor 
rate is BMR compliant.  With the simplified authorisation the competent regulator could, 
however,  modulate  compliance  requirements  based  on  the  fact  that  the  legacy  rate  is 
authorised for a limited period of time only.  

Jurisdiction neutrality. Option  2 would  not avoid  the need to  create  complex statutory 
fall-back provisions for IBOR legacy contracts in the different jurisdictions which govern 
most of the pending USD LIBOR exposures. The new successor rate would need to be 
embedded via a statutory fall-back mechanism (“all references to IBOR shall be read as 
references  to  rate  X”).  Option  2,  while  removing  the  need  to  renegotiate  individual 
contracts, is not “jurisdiction neutral”, as  each jurisdiction would need to statutory fall-
back  laws.  This  also  implies  that  a  statutory  fall-back  provisions  for  English  law 
contracts would not automatically extend to contracts concluded under the laws of other 
EU Member States.  

Cross-border application. A further concern is that a LIBOR legacy rate authorised by a 
competent authority outside of the European Union would need to benefit financial and 

37 Entering into a new transaction may be  necessary to allow supervised entities to maintain the value of 
their legacy positions. For example, if an option in a contract provides the right to enter into a new contract 
at a fixed price in the future, parties would need to be able to execute that contract in order for the option to 
retain its value. 

38 

 
 
                                                           
non-financial  contract  parties  in  the  EU27.  Option  2  would  address  this  matter  in  the 
following way:  

(i)  Sub-option 1: the UK Financial Conduct Authority (FCA) will use its new BMR 
powers to  authorise a USD  LIBOR legacy rate  via the simplified procedure. As 
there is no IBOR conversion, the precise date of authorisation is unknown, but is 
expected to be after January 2022, when the UK is no longer in the single market 
(the UK is expected to depart the single market at the end of 2020). The use of the 
legacy  rate  would  be  allowed  in  the  Union  either  by  way  of  recognition  or 
endorsement. According to the BMR, the authority competent for recognising any 
third  country  rate  will  be  ESMA.  The  competent  authority  for  approving  an 
endorsement  for  use  in  the  Union  would  be  the  competent  regulator  of  the 
endorsing entity.   

(ii) Sub-option  2:  In  case  the  UK  Financial  Conduct  Authority  decided  not  to 
authorise  a  LIBOR  legacy  rate  (or  would  not  be  vested  with  the  appropriate 
powers, e.g., due delays in adoption of the amended BMR beyond the end of the 
transition  period in  December 2020), the  reformed BMR would empower, as  of 
January  2022,  ESMA  to  authorise  a  legacy  rate.    This  authorisation  could  be 
granted  to  the  current  LIBOR  administrator’s  EU  entity  or  to  another 
administrator. 

“No  new  flow”  provisions.  Option  2  would  allow  the  competent  regulator  who  makes 
use of the simplified authorisation procedure to decide on the contracts eligible to use the 
legacy rate. The regulator would, analogous to Option 1, limit use of the legacy rate to 
maintain performance or facilitate the winding down of tough legacy contracts (following 
the same procedure as described in Option 1).  

7.1.4  Option 3: Exemption for a temporary legacy rate 

The  pre-cessation  process.  Once  the  competent  IBOR  regulator  determines  that  the 
IBOR’s  representativeness  cannot  be  restored  and  that  the  benchmark  needs  to  cease, 
Option  3  would  start  a  three  stage  process:  (1)  Initial  notice  of  pre-conversion/pre-
cessation;  (2)  Reconciliation  (four  months);  (3)  Definite  notice  of  pre-conversion/pre-
cessation  announcing  the  precise  date  of  the  IBOR’s  cessation  (withdrawal  of 
authorisation). With option 3, there may or may not be a legacy rate (provided under a 
statutory exemption), the competent regulator has no influence on its existence. 

The temporary legacy rate. The legacy rate would be exempt from compliance with the 
BMR. Contrary to option 1, the principle of “same administrator, same name” would not 
apply. It would be left to private market participants or a public authority to design a rate 
that  reflects  the  credit-sensitive  features  of  an  IBOR,  but  there  would  be  no  need  to 
convince  a  competent  regulator  that  the  successor  rate  is  BMR  compliant.    Due  to  this 
lack  of  regulatory  control,  the  exemption  for  any  successor  rate  would  be  limited  to  a 
period  specified  in  the  BMR  itself.  The  exemption  would  not  be  renewable,  except  by 
means of an amendment to the BMR.  

Jurisdiction neutrality. Option  3 would not  avoid  the need to  create  complex statutory 
fall-back provisions for IBOR legacy contracts in the different jurisdictions which govern 
most of the pending USD LIBOR exposures. The new successor rate would need to be 
embedded via a statutory fall-back mechanism in the various national laws which govern 
the  IBOR  contacts  (“all  references  to  IBOR  shall  be  read  as  references  to  rate  X”). 
Option 3, while removing the need to renegotiate individual contracts, is not “jurisdiction 

39 

 
 
neutral”,  as  each  jurisdiction  would  need  to  adopt  statutory  fall-back  laws.  This  also 
implies  that  a  statutory  fall-back  provision  for,  e.g.,  English  law  contracts  would  not 
automatically extend to contracts concluded under the laws of other EU Member States.  

Cross-border application. As the exempt rate is not subject to any regulatory mandates 
or  approvals,  the  exempt  rate  could  be  used  in  the  European  Union,  irrespective  of 
whether  it  is  administered  inside  the  EU  or  in  a third  country.  The  only  limit  to  cross-
border application would be the expiry of the temporary exemption. 

“No new flow”  provisions. The additional safeguards to  limit  use to  manage or reduce 
their  legacy  exposures  that  apply  to  Options  1  and  2  would  not  apply  to  a  statutory 
exemption;  the  only  safeguard  against  new  debt,  loan  or  derivatives  referencing  the 
legacy rate would be that the exemption is limited in time and not renewable without a 
further statutory amendment. 

7.1.5  Option 4: Mandating a permanent successor rate 

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 into a successor rate for all contracts that require a credit-sensitive borrowing 
benchmark,  Option  4  would  start  a  three  stage  process:  (1)  Initial  notice  of  pre-
required  public 
conversion/pre-cessation; 
consultations  described  above  would  form  part  of  this  four  month  period);  (3)  Definite 
notice  of  pre-conversion/pre-cessation  specifying  the  effective  date  of  the  replacement 
rate.  Option 4 would not require periodic review of usage permissions. 

(2)  Reconciliation 

(four  months, 

the 

The permanent successor rate. The publication of the successor rate would be mandated 
by  the  competent  regulator  that  has  decided  that  the  IBOR  is  no  longer  representative. 
The  advantage  of  a  mandated  successor  rate  would  be  that  this  rate  would  still  be 
published under the “IBOR” name (“same administrator, same name”), even if reflective 
of a different underlying market. The mandate to publish a successor rate would not be 
limited in time, as this rate can be used both for tough legacy, but also for new contracts 
that  require  a  credit  sensitive  rate.  In  order  to  ensure  “representativeness”  of  the 
successor rate, the regulator mandating it would need to be convinced that the new rate is 
based on observable transactions in  the market,  such as the observed cost of EU banks 
borrowing on a wholesale senior and unsecured  basis, as  represented in  a “bank  yield” 
rate. But there might be other, more appropriate data sources that could become available 
in future. In order to “future proof” this approach, the mandating regulator would need to 
have wide discretion to mandate recourse to appropriate data sources based both on the 
yield of loans or debt issued by the entire banking sector, including a representative range 
of  alternative  financing  sources  such  as  asset  managers,  money  market  funds,  broker-
dealers, insurance companies, private equity firms or hedge funds.   

Jurisdiction neutrality. Option 4 would avoid the need to create complex statutory fall-
back  provisions  for  IBOR  legacy  contracts  in  the  different  jurisdictions  which  govern 
most  of  the  pending  USD  LIBOR  exposures.  The  ability  for  a  competent  authority  to 
mandate  the  successor  rate  would  ensure  that  there  is  no  change  of  the  rate  (hence  no 
need to replace the reference rate in a legacy contract), just a change in the methodology 
with  which  the  IBOR  rate  is  assembled.    As  Option  1  removes  the  need  to  renegotiate 
individual  contracts,  it  is  applicable  irrespective  of  the  applicable  law  governing  the 
contract  (“jurisdiction  neutral”).  In  case  the  IBOR  successor  rate  was  mandated  by  a 

40 

 
 
competent  regulator  outside  the  European  Union,  the  same  sub-options  as  those 
described in option 1 would apply.  

“No  new  flow”  provisions.  As  Option  4  is  available  for  contracts,  irrespective  of  their 
date of conclusion, there is no need for “no new flow” provisions.  

7.1.6  Summary  of  the  main  distinguishing  features  of  the  four  policy 

options 

The main distinguishing factors between the various options is the speed and efficiency 
with  which  the  competent  regulator  can  act  in  mandating  the  publication  of  a  suitable 
successor rate for legacy contracts.  In term of effectiveness and efficiency, the decisive 
criteria are whether the legacy or successor rates would be mandated immediately upon a 
finding that the IBOR rate is no longer representative or whether the legacy or successor 
rate would require a private initiative and even a fresh authorisation.  

Table 3 – Summary of the main features of the four policy options – IBOR  

Option 1 

Option 2 

Option 3 

Option 4 

Pre-
conversion/cessation 
process 

Content  of  the  pre-
conversion/cessation 
notice 
Legacy/replacement 
rate 

Three stages ending 
with IBOR 
conversion into a 
tightly monitored 
temporary converted 
rate 
Conversion date plus 
details of new IBOR 
methodology 
Mandated 

Availability 
legacy/replacement 
rate  

of 

Mandated as part of 
IBOR conversion, 
applies immediately 
post conversion 

Jurisdiction neutral 

Cross-border 
application 

No new flow rule 

Does not involve 
renegotiation and 
therefore applies 
across all 
jurisdictions 
Non EU converted 
rate applies via 
ESMA recognition or 
endorsement; EU 
legacy rates is 
mandated by ESMA 
“Manage or reduce” 
usage restrictions 
apply  

Two stages ending 
with the withdrawal 
of the IBOR 
authorisation 

Two stages ending 
with the 
withdrawal of the 
IBOR 
authorisation 

Two stages ending 
with IBOR 
conversion into a 
permanent successor 
rate 

Cessation date  

Cessation date 

Not mandated, 
subject to 
authorisation 

Not mandated, 
requires private 
initiative and 
obtaining 
authorisation, timing 
uncertain 
Requires national 
statutory fall-back 
statutes  

Not mandated, no 
authorisation 
required 

Not mandated, 
requires private 
initiative, but no 
authorisation, 
timing uncertain 

Requires national 
statutory fall-back 
statutes 

Non EU legacy rate 
applies via ESMA 
recognition or 
endorsement; EU 
legacy rates is 
authorised by ESMA 
“Manage or reduce” 
usage restrictions 
apply 

No recognition, 
endorsement or 
authorisation 
requirements 
necessary 

No usage 
restrictions, but 
time limit for 
exemption 

Conversion date plus 
details of new IBOR 
methodology 
Mandated 

Mandated as part of 
IBOR conversion, 
applies immediately 
post conversion 

Does not involve 
renegotiation and 
therefore applies 
across all 
jurisdictions 
Non EU legacy rate 
applies via ESMA 
recognition or 
endorsement; EU 
legacy rates is 
mandated by ESMA 
No usage restrictions 
apply 

7.2 Loss of EU-based risk management tools 

7.2.1  Features 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  allow  EU  banks  to  continue  to  offer  non-
deliverable  forwards  (traded  on  a  transparent  trading  venue  or  through  the  bank)  that 

41 

 
 
 
reference  non-convertible  currency  spot  rates.  The  only  difference  between  the  four 
options lies the legal mechanism to achieve this result.    

Two  of  the  options  aim  to  achieve  continued  availability  of  the  relevant  spot  rates  by 
providing statutory exemptions (Options 2 and 3), another option would require a prior 
authorisation  for the (by necessity standardised)  currency forward  contracts  (Option  1). 
The most far-reaching option would empower the European Commission to delineate and 
regularly review currency spot rates eligible for an exemption (Option 4).  

7.2.2  Option 1: Contract authorisation 

Option  1  would  create  new  powers  in  the  BMR  to  enable  regulators  to  authorise 
individual  non-deliverable  forward  contracts  that  reference  third  country  currency  spot 
exchange rates that are neither recognised nor endorsed for use in the Union (“contract 
authorisation”). Under this amendment, the forward contract (not the spot rates) would 
be  authorised  for  trading  by  EU  banks,  either  on  exchanges  or  via  their  “systematic 
Internalisation” platform.  

This Option would introduce a significant departure from the current set up of the BMR 
architecture,  as 
it  would  switch  from  providing  authorisation  of  benchmark 
administrators  to  authorising  individual  contracts  referencing  certain  benchmarks.  The 
BMR  would  need  to  include  provisions  specifying  which  regulator  is  competent  to 
approve  the  relevant  non-deliverable  forward  contracts.  The  obvious  choice  would  be 
that authorisations are granted by the regulator who supervises the relevant EU bank, but 
it could also be the competent regulator supervising the listing venue (a regulated market 
or  a  multilateral  trading  platform,  see  Section  2.2  above).  The  territorial  scope  of  the 
authorisation would therefore be limited to the Member State where the bank or trading 
venue are authorised.  

Option 1 would also need to establish new BMR powers to authorise individual forward 
contracts  (by  necessity  with  standardised  terms  and  conditions  as  well  as  with 
standardised maturities), as the current supervision of trading venues, be they regulated 
markets  or  multilateral  trading  platforms,  does  not  comprise  the  authorisation  of 
individual contracts.  The authorisation approach would therefore imply a paradigm shift 
not  only  for  the  BMR,  but  also  for  other  pieces  of  EU  legislation  that  cover  the 
supervision  of  market  infrastructure,  notably  the  regulation  on  markets  in  financial 
instruments (MiFIR).  

In  granting  authorisation  for  forward  contracts,  competent  regulators  would  have  to 
verify certain basic features, such as a sufficiently robust waterfall of spot rate sources or 
options  in:  (i)  a  primary  rate  source;  (ii)  non-primary  rate  sources,  including  "fall-back 
rates",  which  may  be  published  or  unpublished.  On  the  other  hand,  overly  narrow 
phrasing  of the  foreign  exchange spot  rates  admitted for  reference in  forward  contracts 
offered in the EU would not make this option sufficiently “future proof” and hence not 
provide an adequate solution for the problems. 

7.2.3  Option 2: Contract exemption 

Option 2 would introduce a new statutory exemption in the BMR according to which the 
reference  to  a  spot  rate  to  calculate  the  payments  due  in  a  forward  contract  is  not 
considered  in  scope  of  the  BMR  (“contract  exemption”).  The  difference  from  the 
authorisation option (option 1) would reside in the fact that, instead of individual contract 
authorisations, all currency forward contracts referencing a third country spot rate would 
42 

 
 
be  exempt  from  the  BMR,  without  the  need  for  intervention  of  a  national  competent 
authority,  either  in  the  Member  State  where  the  bank  or  the  trading  venue  offering  the 
forward contract are located. This would avoid administrative burdens and align with the 
current  (non-regulated)  status  of  over-the-counter  forward  contracts  offered  by  non-EU 
banks. It would also mean that the territorial scope of the exemption would comprise any 
contract offered anywhere in the EU (cross-border application).  

Like  the  authorisation  option,  in  order  to  avoid  uncertainty  among  market  participants, 
the scope of the exemption for spot rates that can be referenced in EU forward contracts 
would have to be made very clear. In order to ring-fence this exemption to currency spot 
rates used for purposes of calculating contractual payments under a forward contract, the 
exemption  would  apply  to  all  forward  contracts  referencing  a  spot  rate  (aka  as  the 
“settlement” rate) for a non-convertible currency.  

7.2.4  Option 3: Spot rate exemption 

Option  3  would  introduce  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 when they are used in forward contracts written by EU banks (“spot rate 
exemption”).  As  anticipated,  this  regulatory  intervention  would  treat  foreign  exchange 
spot rates (whether based on a survey or a transaction-based mechanism) akin to central 
bank spot exchange rates. The exemption would allow forward contracts offered by EU 
banks or traded on EU exchanges to reference third country spot currency rates without 
the  need  of  equivalence,  recognition  or  endorsement.  The  territorial  scope  of  the 
exemption  would  comprise  any  forward  contract  referencing  an  exempt  spot  offered 
anywhere in the EU (cross-border application). 

This  exemption  would  be  designed  to  exclude  foreign  exchange  spot  rates  used  in 
forward  contracts  as  “settlement”  rates  to  calculate  the  parties’  respective  contractual 
obligations.  As  the  rate  exemption  option  would  expand  on  the  concept  of  the  central 
bank  and  “public  authority”  exemptions  currently  present  in  the  BMR,  it  would  be 
formulated  so  as  to  include  all  currency  spot  rates  for  non-convertible  currencies  (as 
explained  in  Section  2.2,  the  non-convertible  nature  implies  that  the  rate  is  a  public 
policy tool). 

7.2.5  Option 4: Rate designation 

Option  4  would  introduce–  in  analogy  to  the  designation  of  an  index  as  a  critical 
benchmark according to the current Article 20 BMR – a new empowerment in the BMR 
empowering the European Commission to designate certain currency spot rates as critical 
benchmarks,  with  the consequence that all spot exchange rates not  designated could  be 
referenced  in  forward  contracts  offered  by  European  banks  without  equivalence 
recognition  or  endorsement  (“rate  designation”)  being  necessary.  Only  third  country 
spot rates considered critical would have to be BMR-compliant.  

The  designation  approach  is  the  “reverse  side  of  the  medal”  to  the  rate  exemption 
approach:  instead  of  exempting  a  defined  set  of  rates  (spot  rates  for  non-convertible 
currencies), only spot rates that are designated as “critical” by a delegated act issued by 
the European Commission would be in scope of the BMR.  

A  designation  as  critical  would  rely  on  three  criteria  (i)  the  financial  benchmark  has 
systemic  importance  in  the  financial  system  of  the  Union,  (ii)  a  disruption  in  the 
determination  of  the  financial  benchmark  could  affect  public  confidence  in  the 
43 

 
 
benchmark  or  financial  system  of  the  Union,  (iii)  the  determination  of  the  financial 
benchmark could be susceptible to manipulation.  

Many  currency  spot  rates,  although  important  for  export  industries,  due  to  their  rather 
limited  use  compared  to  other  categories  of  benchmarks,  would  not  be  deemed  of 
systemic importance for the safeguard of financial stability in the EU, hence only major 
currency spot rates such as the USD/EUR exchange rate might be suitable candidates for 
designation as critical by the European Commission.. 

7.2.6  Summary  of  the  main  distinguishing  features  of  the  four  policy 

options 

The main distinguishing factors between the various options is the speed and efficiency 
with  which  the  reference  to  currency  rates  in  listed  derivatives  could  be  allowed:  the 
options entailing an exemption would allow a prompt reference of the rate. On the other 
hand,  option  1  requiring  an  authorisation  by  the  competent  regulator  would  reach  the 
same objective of the other three with more administrative burdens and in a longer time.  

Table 4 – Summary of the main features of the four policy options – risk management tool 

Option 1 

Option 2 

Option 3 

Option 4 

Coverage  

Availability of 
spot rate for 
calculating 
forward 
payments 

Cross-border 
application 

Forward contracts that 
contain a sufficiently 
robust waterfall of spot 
rate sources 

Requires prior 
authorisation of eligible 
forward contracts 

Contract authorisation 
applies either in the 
Member State where the 
bank offering the forward 
or the trading venue 
offering the forward for 
trading are located, no 
cross-border application. 

All forward 
contracts 
referencing a spot 
rate for a non-
convertible 
currency 
Available for all 
contracts covered 
by the exemption 
(defined as 
forwards 
referencing spot 
rates for non-
convertible 
currencies) 
The territorial 
scope of the 
exemption would 
comprise any 
contract offered 
anywhere in the EU 
(cross-border 
application 

All currency spot rates 
provided for non-
convertible currencies 

All currency spot 
rates, except those 
designated as critical 
by the EC. 

Immediately available 
for all spot rates 
covered by the 
exemption (spot rates 
for non-convertible 
currencies) 

Immediately 
available for all spot 
rates not designated 
as critical by the EC. 

The territorial scope of 
the exemption would 
comprise any forward 
contract referencing an 
exempt spot rate 
offered anywhere in the 
EU (cross-border 
application). 

The territorial scope 
of the exemption 
would comprise any 
forward contract 
referencing a spot 
rate not designated as 
critical by the EC. 

8  OPTION DISCARDED AT AN EARLY STAGE 

8.1  Disorderly IBOR transition  

Option 4 is discarded at an early stage as no competent securities market regulator, at this 
stage  in  the  incipient  efforts  to  create  credit-sensitive  replacements  for  an  IBOR  rate, 
would  have  the  capacity  to  determine  all  the  necessary  data  sources  for  such  a  credit 
sensitive  rate.  While  it  is  possible  for  a  central  bank  to  rely  on  statistical  data  to 
determine  a  daily  overnight  interbank  borrowing  rate,  the  construction  of  a  credit-
sensitive  rate,  such  as  an  IBOR,  is  more  complex  and  requires  a  broader  set  of  data 
sources. Recent initiatives show the heterogeneous approaches taken by the private sector 
in trying to construct alternatives to USD LIBOR:  

44 

 
 
 
 
  AMERIBOR  (the  American  Interbank  Overnight  Rate),  is  constructed  from 
wholesale  bank  funding  data  and  tracks  rates  at  Cboe’s  American  Financial 
Exchange, where 150 smaller regional US banks lend for various maturity ranges 
to each other;   

  The ICE Bank Yield Index (IBYI) is based on wholesale bank funding data38. The 
IBYI will comprise term deposits,  commercial  paper  and certificates of  deposit, 
but  also  bond  yields  that reflect  trading in  secondary markets.  The  IBYI  can be 
used as an add-on to SOFR or as stand-alone rate.  

 

IHS  Markit  is  developing  a  credit-sensitive  rate39  based  on  credit  default  swap 
price data collected by the firm over three million daily price quotes on more than 
3,800 single-name CDS contracts for its CDX and iTraxx indices. 

Many  markets  regulators  would  find  it  difficult  or  even  incompatible  with  their 
“compliance-focused” mandate to select “winners and losers” among the various credit-
sensitive rates that are currently being tested by the private sector. This report therefore 
concludes  that  any  regulatory  mandate  for  a  permanent  IBOR  successor  rate  would  be 
inappropriate.  

8.2  Loss of an EU-based management tool 

The  designation  option  (option  4)  was  discarded  at  an  early  stage  because  it  is  a 
functional equivalent to the exemption approach (option 3) in the sense that the end result 
would be the disapplication of the BMR for a specified type of foreign spot exchange rate 
(a  spot  exchange  rate  for  a  non-convertible  currency).  However,  this  option  is  less 
consistent with the original BMR approach to provide for comprehensive coverage of all 
third country benchmarks (the “all-in” approach was a specific policy goal at the time the 
BMR was negotiated). This change of approach is likely to create some uncertainty for 
market participants, as also spot exchange rate for fully convertible currencies might be 
covered,  unless  a  delegated  act  by  the  European  Commission  would  designate  an 
exchange rate as “critical”. 

Empowering  the  European  Commission  to  designate  spot  exchange  rates  as  critical 
would  also  entail  certain  administrative  costs  and  be  a  potentially  time-consuming 
process.  Furthermore,  this  option  would  require  a  prolonged  timeframe  to  deploy  its 
effects, since it necessitates not only amending the BMR but also subsequently adopting 
one  or  several  delegated  acts  to  provide  market  participants  with  clarity  as  to  which 
exchange rates are critical (and would therefore require recognition or endorsement) and 
which ones are not (and could therefore be used without recognition and endorsement to 
calculate forward payments). 

Considering  that  this  policy  option  would  be  nothing  more  than  an  alternative  way  to 
achieve a result that could be accomplished with a statutory exemption in a less complex 
and time-consuming way (Option 3°, Option 4 is discarded at an early stage.  

38 See ICE working documents: https://www.theice.com/iba/Bank-Yield-Index-Test-Rates.  
39 Risk.net article of 12 May 2020, Markit plans to design a credit spread add-on using CDS data. Markit’s 
financials sub-index is considered likely to be used as a proxy for bank funding costs, with corporate CDS 
sectors potentially added to SOFR to more accurately match loan rates to the implied credit risk of the 
borrower 

45 

 
 
                                                           
9  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 

9.1  Disorderly IBOR transition  

9.1.1  Specific objective no 1: Legal certainty 

All  three  options  comprise  the  issuance  of  two  “pre-conversion/pre-cessation”  notices 
and would be characterised by a high degree of legal certainty giving market participants 
a clear schedule of events and certainty on the availability of a legacy rate.  

Option 1 scores highest on legal certainty as the IBOR cessation (in its previous form) is 
directly linked to the regulator mandating conversion of the IBOR into a legacy rate. This 
implies that legacy rate is available at the time the IBOR in its previous form is no longer 
published.  In  this  way  IBOR  cessation  (in  its  previous  form)  is  contingent  on  a 
conversion of the previous version into a legacy rate.  

This  contingency  is  not  ensured  with  Options  2  and  3,  as  the  regulator  would  be 
empowered  to  order  the  cessation  of  IBOR,  irrespective  of  whether  a  legacy  rate  is 
available  and authorised for use in  legacy  contracts  or irrespective of  whether  a legacy 
rate is available to benefit from the statutory exemption in the BMR.  

9.1.2  Specific  objective  No  2:  Effectiveness  for  users  (balance  sheet 

management) 

A legacy rate can only be effective if it is accepted by market participants. The only way 
to achieve acceptance is by testing the rate with market participants prior to publication.  

In order to enhance the acceptance of a mandated, authorised or exempt legacy rate, the 
proposed changes to the old IBOR rate will require market consultation. A high degree of 
acceptance can be ensured with Options 1 and 2, as the regulator-initiated changes to the 
IBOR methodology or the methodology underpinning an authorise IBOR legacy rate can 
be consulted prior to implementation so that all market participants can understand and 
accept the rate prior to conversion/authorisation by the competent regulator. Option 3, as 
it requires no action by the competent regulator, will not  yield a rate that is based on a 
methodology that is subject to a broad-based market consultation.  

Option  1  scores  highest  in  ensuring  transparency  for  benchmark  users  and  in  ensuring 
that  users  have  input  into  the  change-process.  This  is  because  the  public  consultation 
would  be  organised  by  the  competent  regulator,  who  would  be  able  to  ensure  that  the 
focus  is  appropriate  and  covers  practical  aspects  of  the  proposed  changes  such  as,  for 
example,  risk  implications  and  operational  implications,  or  key  variables  in  a 
calculation.   

Option 2 would oblige a potential administrator to conduct the consultation process prior 
to  seeking  authorisation,  with  the  consequence  that  a  private  sector  consultation  is  less 
prominent  and  carries  potentially  less  “clout”  among  the  stakeholder  community.  In 
addition,  a  private  administrator  might  be  less  detailed  in  describing  the  details  of  the 
methodology underpinning  a new benchmark  (as this might  be  commercially sensitive) 
or  might  feel  less  need  in  consulting  on  methodological  detail.  A  less  transparent 
consultation  on  the  methodology  behind  a  legacy  benchmark  will  provide  market 
participants  with  less  transparency  and  a  lower  ability  to  assess  the  suitability  of  the 
altered benchmark for continued use in their legacy portfolio.  

46 

 
 
Option 3 scores lowest in terms of transparency and acceptance, as a statutory exemption 
cannot  be  made  contingent  on  only  “pre-consulted”  rates  being  able  to  benefit.  A 
statutory  exemption  provides  no  legal  hook  to  ensure  that  rates  published  under  the 
exemption  are  sufficiently  pre-consulted.    The  rates  published  under  an  exemption 
therefore risk missing the intended purpose.  

9.1.3  Specific objective No 3: Continuity 

Sub-objective  1:  Seamless  transition:  In  order  for  the  pre-conversion/pre-cessation 
process to be effective, the competent regulator should only be able to launch this process 
only  once  the  methodology  for  a  legacy  rate  is  available  and  agreed  by  market 
participants.  

Option 1 best ensures that the pre-conversion notice can only be issued when all material 
aspects  of  the  mandated  legacy  rate,  such  as  sourcing  of  new  input  data,  developing  a 
new  calculation  methodology,  and  establishing  surveillance  procedures  and  publication 
tools are in place. This is important as changes to an IBOR rate require technological and 
procedural  development,  and  potentially  sourcing  and  agreeing  (where  possible)  new 
data provision arrangements with third party providers (e.g., the underlying risk-free rate 
to  which  the  credit  spread  is  added  must  be  obtained  from  the  US  Federal  Reserve). 
Option 1 therefore provides clarity on the issues  the competent regulator must consider 
when choosing the methodology for the mandated legacy rate. 

Options 2 and 3 only require a pre-cessation notice which provides clarity on when the 
IBOR ceases to be published, but does not require any further clarity on whether a legacy 
rate  is  available  upon  IBOR  cessation  (Option  3)  or  available  and  authorised  for  use 
(Option 2) prior to the withdrawal of the IBOR’s authorisation. These later stages are left 
to private sector initiatives which may or may not produce a legacy rate that is subject to 
prior stakeholder consultation.  Options 2 and 3 therefore provide no build-in  clarity on 
what  issues  the  competent  regulator  (legislator)  must  consider  when  authorising 
(exempting) a legacy rate based on an alternative methodology. These rates would also 
unlikely  to  be  available  concurrently  with  the  IBOR  cessation,  a  gap  that  creates  legal 
uncertainty and the above described risks of contract frustration. 

Sub-objective  2:  Time  to  prepare  the  transition.  Users  of  the  legacy  rate  would  also 
need  time  to  assess  and  address  any  consequential  changes  in  their  risk  positions  and 
operations,  and  any  potential  contractual  and  legal  impacts.  Where  a  change  to  the 
methodology  of  a  benchmark  is  proposed  (i.e.,  the  rate  no  longer  measures  current 
unsecured bank funding costs but rather changes to a risk free rate plus a fixed historical 
bank lending spread), there will be operational impacts that need to be assessed prior to 
the publication of the “pre-cessation” notice.  

Again,  Option  1  scores  better  than  Options  2  and  3  on  the  timing  of  the  pre-cessation 
notice as they oblige the competent regulator to assess all material operational and legal 
risk inherent in the IBOR conversion, prior to issuing the pre-conversion notice (as there 
is  an  obligation  to  mandate  the  legacy  rate  immediately  upon  announcing  the  effective 
date of the old LIBOR’s cessation). 

Options 2 and 3, by contrast, do not require clarity on all material aspects of a potential 
successor  rate,  which  leaves  uncertainty  as  to  when  a  legacy  rate  will  be  authorised  or 
when such a rate will be published under a statutory exemption. Options 2 and 3 would 
therefore be less effective in ensuring a smooth IBOR transition 

47 

 
 
Sub-objective  3:  Sustainability.  Option  1,  on  the  other  hand,  entails  a  certain  risk  to 
continuity where an administrator is unable or unwilling to effect the changes required by 
the  competent  authority  or  considers  that  continued  publication  of  a  legacy  rate  would 
result  in  material  risk  to  the  administrator.  In  these  circumstances,  the  administrator 
could be tempted to withdraw from the process of designing the legacy rate, obliging the 
competent authority either to appoint a replacement or arrange for publication of the rate 
itself.  This  risk  is  obviously  also  inherent  in  relying  on  a  statutory  exemption  for  the 
legacy rate to be published (Option 3).  

Option  2  would  mitigate  this  risk  because,  even  a  simplified,  authorisation  procedure 
would  ensure  that  the  administrator  has  a  clear  and  unambiguous  permit  to  publish the 
rate as compliant with the BMR.  

In  order  to  avoid  risks  of  discontinuity  for  an  IBOR  published  with  a  changed 
methodology  (or  a  changed  underlying  economic  reality),  it  might  be  necessary  to 
exempt the administrator from certain requirements of the BMR relating to the quality of 
the  input  data  or  to  representativeness  in  relation  to  an  underlying.  This  is  especially 
acute,  should  the  legacy  rate  be  based  on  a  formulaic  approach  based  on  risk  free 
underlying  plus  a  historic  spread.  As  the  administrator  will  no  longer  have  any  control 
over the benchmark and its methodology, the mandated legacy rate is  only effective, if 
there is clarity on the “no liability” rule in publishing a mandated rate. In order to address 
the  liability  issue,  Option  1  requires  that  the  competent  regulator  is  given  clear  and 
unambiguous powers to change the underlying methodology of the IBOR. 

Options 1 and 3 are best in ensuring the “no liability” rule as the rate is mandated by a 
competent regulator (Option 1) or specifically exempt from BMR compliance (Option 3). 
Option  2  is  least  suitable  in  ensuring  this  principle,  as  the  administrator  must  seek  an 
authorisation, albeit in a simplified process.   

9.1.4  Specific  objective  no.  4:  Allow  orderly  wind-down  of  any  critical 

benchmark:  

Option 1 would provide the regulator with most comprehensive set of powers to ensure 
the orderly wind-down of a critical benchmark. The benchmark conversion toolkit under 
option 1 is flexible enough to be adapted to the particularities surrounding the cessation 
of  any  type  of  critical  benchmark.  The  fact  that  under  option  1,  the  regulator  is  very 
much involved in the various phases of the orderly wind-down of a benchmark and has a 
considerable degree of discretion in designing the legacy rate, means that this option is 
suited  to  ensure  the  orderly  wind-down  of  any  critical  benchmark.  Although  designed 
with the cessation of LIBOR in mind, option 1 would allow the regulator to mandate the 
change of methodology, make changes to the code of conduct of the benchmark or any 
other  changes  to  benchmark  rules,  which  are  all  general  empowerments  that  can  be 
applied in case of a cessation event of any critical benchmark. 

Option 2 and 3 comparatively score lower against this objective.  

Option  2  relies  on  private  market  participants  to  design  and  put  forward  a  temporary 
legacy rate for the discontinued benchmark, with the regulator authorizing the rate via a 
simplified  procedure  at  the  end  of  the  process.  Since  under  this  option  the  impetus  for 
identifying the legacy rate comes, by design, from private sector initiatives, this option is 
dependent on the private sector incentives for rolling out a legacy benchmark. While this 
reliance on  a private sector-led solution  could  be justified in  case of  LIBOR, given the 

48 

 
 
systemic need to find a legacy rate, it may not make it most suitable for the wind-down 
of  all  benchmarks,  in  particular  those  where  the  stakeholder  makeup  is  such  that  the 
private sector administrator may not be sufficiently incentivized to seek an authorisation 
for the legacy benchmark.    

Option 3 is even more reliant on private sector initiative to find a legacy rate, while not 
affording litigation protection to  the administrator publishing the rate in  the form  of an 
authorization by the regulator. Therefore, it scores lower than option 2 against objective 
no  4.  Indeed,  the  increased  legal  risk  for  the  potential  administrator  of  the  rate  may 
discourage it to engage in designing and publishing the legacy benchmark, which makes 
the  viability  of  this  option  dependent  on  the  features  of  a  specific  benchmark,  its  user 
base  and  other  incentives  outside  the  scope  of  regulator’s  influence.  While  due  to  the 
varied and large user base of LIBOR, option 3 provides proper incentives for the private 
sector  administrator  to  design  a  replacement  rate,  this  may  not  be  the  case  for  other 
benchmarks.  Therefore,  option  3  is  not  well-suited  to  ensure  an  orderly  wind-down  of 
critical benchmarks across the board.  

9.2  Loss of an EU-based risk management tool 

9.2.1.  Specific  objective  no.  1:  Maintain  exchange  trading  of  currency 

forwards  

The best policy options to ensure that the EU based derivative contracts hedging foreign 
exchange  risk  continue  trading  on  regulated  markets  avoiding  migration  to  less 
transparent  over-the-counter  (OTC)  trading  are  Options  2  and  3  which  provide  for 
exemptions of the spot rates/the forward contracts referencing those spot rates from the 
scope  of  application  of  the  BMR.  Option  1  leaves  some  form  of  discretion  to  the 
competent authority which has to authorise the contract. 

Option  1  scores  the  lowest  in  ensuring  transparency  for  currency  forward  trading. 
Competent  authorities  would  have  a  limited  discretion  to  assess  those  contracts  against 
the legislative requirements provided for the authorisation. Several contracts might not be 
suitable for being authorised and need to migrate to over-the-counter trading. Depending 
on the efficiency of the competent authority and on other administrative factors, in some 
cases, the burden of complying with the requirements to seek individual authorisation for 
each  hedging  contract  is  likely  to  discourage  the  offer  of  exchange-traded  foreign 
exchange contract relying on spot exchange rates.  

Both  Option  2  and  option  3  would  score  highest  in  maintaining  high  standards  of 
transparency.  A  statutory  exemption,  either  for  forward  contracts  referencing  the  spot 
rate or for the spot rate itself, entails legal certainty that contracts referencing those spot 
rates can be offered on regulated markets.  

9.2.2  Specific  objective  no.  2:  Maintain  a  risk  management  tool  for  EU 

exporters and foreign direct investors 

Option  1  would  score  the  lowest  against  this  objective.  Empowering  competent 
authorities with a specific authorisation for forward contracts referencing spot exchange 
rates would make those contracts subject to the risk of not being permitted. A rejection of 
the  authorisation  would  leave  EU  exporters  and  foreign  direct  investors  in  the 

49 

 
 
 
impossibility  to  be  protected  against  volatility  risks  by  means  of  EU  based  derivatives 
contracts. 

Option  2  and  Option  3  would  be  the  best  in  creating  a  legal  framework  allowing  EU 
exporters  and  foreign  direct  investors,  as  well  as  EU  banks,  to  continue  to  manage 
currency  risk  by  means  of  EU  based  forward  contracts.  Providing  exemptions  for  the 
relevant forward contracts or spot rates would ensure a clean “safe harbour” for this risk 
management tool. 

9.2.3  Specific  objective  no.  3:  Avoid  EU  banks’  undue  exposure  to 

currency risk 

Option 2 and Option 3 would highest on maintaining EU banks current risk management 
approach.  As  explained  in  Section  2.2.,  the  most  important  tool  for  currency  risk 
management  is  a  deep  and  liquid  EU  market  for  forward  contracts.  Banks  only  offer  a 
hedge to  a client  if they can mitigate the resulting risk to  themselves.  While banks can 
hedge  a  certain  level  of  exposures  internally  by  offsetting  client  positions  (aka  as  risk 
warehousing’),  the  ability  to  hedge  currency  risk  with  other  banks  in  the  interbank 
market  and  with  a  multitude  of  other  market  participants  is  a  prerequisite  of  managing 
and being able to meet the bank’s internal risk limits. 

This  range  of  interests  and  participants  increases  market  liquidity  in  a  given  forward 
contract and creates further opportunities to manage the bank’s net exposure. Preventing 
the  emergence  of  a  forward  market  for  non-convertible  currencies  is  therefore 
detrimental for bank’s risk management and both Options 2 and 3 are the most effective 
in granting European banks the most immediate access to the spot rates that are needed to 
calculate contractual obligations under the forward contracts.  

Option  1  would  also  score  high  in  maintaining  forward  contracts  as  efficient  risk 
management  tools,  provided  that  the  competent  regulator  authorises  the  relevant 
contracts  within  predictable  timeframes.  The  competent  authority  would  in  fact  be 
empowered  with  a  scrutiny  over  contracts  referencing  those  FX  rates  to  verify  certain 
basic features of the rates40 referred to in the contracts offered by EU banks which would 
allow a higher degree of supervision. 

As the contract authorisation would require some time, Option 1 is slightly less efficient 
than Options 2 and 3.  

9.2.4  Specific  objective  no.  4:  Ensure  EU  banks’ 

international 

competitiveness is not unduly hampered 

Of the non-discarded options, options 2 and 3 would score highest in this regard. This is 
the  result  of  the  options  not  requiring  the  bank  to  take  the  initiative  to  seek  the 
authorisation or the exemption for either the rate used or the contract offered.  

Moreover, for option 2, and for option 3 once a rate is exempt, any EU bank could offer 
hedging  contracts  based  on  that  rate,  with  the  specificities  of  the  contract  offered 

40 Such as  whether the  foreign  exchange hedging contracts  will refer to a sufficiently robust  waterfall of 
settlement  rate  sources  or  options  in:  (i)  a  primary  rate  source;  (ii)  non-primary  rate  sources,  including 
"fall-back rates", which may be published or unpublished. 

50 

 
 
                                                           
unencumbered by any specificity of the authorisation. In that regard, an EU bank would 
thus be as free as any non-EU bank in offering hedging products. 

Options  1  while  still  allowing  EU  banks  to  offer  hedging  products  on  rates  that  would 
currently not meet the requirements of the BMR, would clearly be more burdensome for 
an EU bank as it would need to seek the authorisation from its competent authority for 
each contract offered. This would certainly put it at a net disadvantage when compared to 
non-EU banks. 

9 

IMPACTS PER CATEGORY OF STAKEHOLDER 

10.1 Disorderly IBOR transition 

The main stakeholders affected by a disorderly IBOR cessation would be banks (both as 
IBOR contributors and as users of IBOR rates in both their borrowing and their lending 
activities),  corporate  borrowers,  corporate  and  financial  sector  debt  issuers,  benchmark 
administrators,  competent  benchmark  regulators  and  central  banks.  Retail  users  would 
only be marginally affected as the stock of retail mortgages referencing LIBOR is rather 
low.  Potential  impact  on  retail  investors  are  nevertheless  included  in  the  list  as 
EURIBOR references are common features in floating rate retail mortgages in Spain and 
Italy. 

10.1.1  Option 1: Mandating conversion to a temporary legacy rate 

Contributors  

Option 1 will most likely no longer require panel bank submissions; they therefore do not 
require the engagement of the current IBOR contributors, resulting in a net reduction of 
both  of  costs  and  liabilities  for  these  stakeholders.  Legacy  rates  will  typically  take  the 
form of a “tracker rate” of the relevant currency risk-free rate plus an appropriate spread 
to reflect the credit sensitive quality of an IBOR. As the spread will be calculated on the 
historic  mean  difference  between  a  risk  free  and  a  credit  sensitive  rate,  it  will  be  fixed 
and does not require transaction data from panel banks.  

Administrators 

Option  1  provides  the  highest  degree  of  legal  certainty  to  the  administrator  that  is 
mandated  to  convert  an  IBOR  into  a  temporary  legacy  rate.  This  option  provides  the 
regulator  with  the  clearest  mandate  on  all  the  issues  that  need  to  be  considered  before 
converting the existing IBOR into a legacy rate, such as sourcing of necessary input data, 
developing a new calculation methodology, and establishing surveillance procedures and 
publication tools.  

Close discussions between the administrator and the competent regulator will be crucial 
in discussing any of these proposed methodology changes and the exercise of any of the 
new  powers  more  generally.  Option  1  is  the  only  option  that  would  allow  for  such  a 
“forward-looking”  engagement  between  the  regulator  and  the  competent  authority,  the 
reconciliation  process  for  all  other  options  is  confined  to  the  organisation  of  the  IBOR 
cessation  and  the  precise  timing  on  when  the  withdrawal  of  the  IBOR  authorisation 
would take effect. 

51 

 
 
Option  1  is  also  the  only  option  that  provides  up-front  clarity  on  the  required 
methodology for a legacy rate, allowing the administrator to engage, at an early stage, in 
sourcing and agreeing new data provision arrangements with third party providers (where 
necessary). 

Option 1 best ensures that an administrator, which is compelled to publish an IBOR with 
a  changed  methodology  (or  even  a  changed  underlying  economic  reality),  is  exempted 
from the requirements of the BMR on issues such as input data or appropriateness of the 
methodology; issues over which a mandated administrator will not have any control.  

In order to grant the administrator with a legal defence (“liability shield”) in relation to 
the  publication  and  use  of  a  legacy  rate,  Option  1  grants  the  competent  regulator  clear 
and  unambiguous  powers  to  compel  the  administrator  to  change  the  methodology  (and 
potentially the economic reality of the IBOR) and to compel the administrator to publish 
this converted legacy IBOR as a continuation of the previous IBOR. Option 1 leaves no 
uncertainty  or  confusion  as  to  the  exercise  of  these  regulatory  powers  and  their  legal 
consequences.  The  precise  regulatory  mandate  in  Option  1  provides  the  administrator 
with  an  express  safe-harbour  or  immunity  offering  protection  from  lawsuits.  Option  1 
implies that, since the regulator (acting in accordance with its statutory empowerments) 
mandates  the  methodology  underpinning  the  temporary  legacy  rate,  the  administrator 
would not face liability or litigation risk in publishing the mandated legacy rate.   

Another important aspect for administrators are potential licence fees to be paid upstream 
of producing the legacy  rate that results  from  an  IBOR  conversion. With Option  1, the 
following considerations need to be taken into account:  

Cost  and charges associated with  the administration  of legacy  rates depend on whether 
the  administrator  would  need  to  license  certain  input  data  (e.g.,  risk-free  rates, 
compounded risk-free term rates, forward looking risk-free rates). If these base rate RFRs 
are  published  by  the  private  sector  (e.g.,  the  SIX  Exchange  publishes  SARON),  then 
licence fees would be due when a legacy rate is produced using the base rate as one set of 
input data. A private administrator of the RFR base rate would most likely calculate a fee 
for the legacy rate administrator to integrate its RFR rate. Potentially, users would also 
have to pay a fee to the administrator of the base rate, once the legacy comprises a third 
party  base  rate  as  one  of  its  components  (although  the  latter  scenario  reflects  current 
practice and might not apply to a legally mandated legacy rate).   

On the other hand, for those RFR base rates that are published by central banks (the FED 
publishes  SOFR,  the  BoE  SONIA  and  the  ECB  €  STR),  no  license  fees  might  be  due. 
But as soon as the mandated legacy rate would require use of a compounded version of 
the  risk-free  rate  (a  “term  equivalent”  risk  free  rate)  that  is  compiled  by  a  private 
administrator,  such  as  Bloomberg,  the  legacy  rate  administrator  would  need  to  pay  a 
license fee for the “term equivalent” version RFR.   

Even  if  the  mandated  legacy  rate  administrator  would  be  able  to  obtain  the  relevant 
inputs for free from, e.g., a central bank, it would still charge a license fee to establish a 
reserve fund to cover potential litigation risk. This is especially the case when the legacy 
rate is published in several jurisdictions, because some jurisdictions (such as the United 
States) do not offer the “liability shield” that is provided by Option 1 under an amended 
EU  benchmark  regulation.  The  potential  amount  of  a  license  fee  would  depend  on  the 
administrator’s  assessment  of  litigation  risk  and  the  amounts  that  would  need  to  be  set 
aside in reserve in order to cover this risk.  The amounts might be lower if the state of 
52 

 
 
NY (and other relevant US states) adopts a statutory fall-back mechanism.  If they do not, 
fees for legacy LIBOR will be much higher.   

Users 

The  legacy  rate  is  designed  as  a  “single  replacement  rate”  for  a  discontinued  IBOR.  A 
single replacement rate would imply that there is one methodology which determines the 
rate. This would ensure that the fall-back rate is calculated in the identical manner across 
all asset classes and applies to all legacy contracts, regardless of the “governing law” of 
the  contract.  Option  1  will,  therefore,  also  be  suitable  as  a  fall-back  for  multicurrency 
loan agreements; avoiding the insertion of a replacement rate for each IBOR currency is 
a clear benefit for benchmark users in the loan markets.  

Users would also need time to assess and address any consequential changes in their risk 
positions and operations, and any potential contractual and legal impact. Where a change 
to  the  underlying  economic  reality  of  a  benchmark  is  proposed  (i.e.  the  rate  no  longer 
measures current unsecured bank funding costs but rather changes in risk free rates plus a 
fixed historical bank lending spread), the impact is likely to be greater, both in terms of 
economic  risks,  operations  and  legal  contracts,  and  so  will  require  more  time  for  an 
administrator and users of a benchmark to assess and address this.  

More specifically on the operating costs, these will likely turn out to be absorbed by the 
overall operational expenditure incurred by the users as part of the transition from IBORs 
to risk-free rates. This because the rate recommended as a fall-back rate for legacy IBOR 
contracts  would  most  likely  also  emerge  as  the  legacy  rate  mandated  through  the 
conversion process.  

Since the features of the credit sensitive IBOR rate are fundamentally different from its 
successor benchmark based on a risk-free rate, the users will have to identify internal and 
external  system  changes,  assess  impacts  on  processes  and  controls,  and  implement 
system changes. However, the public policy commitment to IBOR reform and phase-out 
has been known to the industry for a few years already, and therefore the users will have 
already started implementing the operational changes needed to accommodate the overall 
transition.  Internally  transferring  tough  legacy  contracts  to  the  legacy  rate  should  thus 
represent a minor cost item in the overall operational expenditures incurred by the users 
in a wider transition context. 

Option  1  is  the  only  option  that  allows  for  a  regulator-led  public  consultation  on  the 
material  changes  to  an  IBOR  benchmark  that  may  be  required  in  converting  such  a 
benchmark into a sustainable legacy rate. As opposed to Options 2 and 3, Option 1 would 
provide  up-front  clarity  as  to  legacy  rate’s  input  data,  calculation  methodology,  and 
applicable surveillance procedures and publication tools. Option 1 therefore best ensures 
that  the  consultation  result  would  directly  translate  into  a  “pre-conversion”  notice  that 
clearly sets out a seamless transition path from the previous IBOR to its legacy rate. 

Option 1 would also require transparency for users and would best ensure that users have 
input into the IBOR conversion process. The consultation organised by a regulator would 
allow  focus  on  specific  aspects  of  the  proposed  changes  such  as,  for  example,  risk 
implications and operational implications, or key variables in a calculation.  With Option 
1 market  participants  will have transparency  and be able to  assess the suitability of the 
converted benchmark. 

53 

 
 
In  order  to  grant  users  with  a  legal  defence  in  relation  to  the  publication  and  use  of  a 
legacy  rate,  Option  1  grants  the  competent  regulator  clear  and  unambiguous  powers  to 
compel  the  administrator  to  change  the  methodology  (and  potentially  the  economic 
reality  of  the  IBOR)  and  to  compel  the  administrator  to  publish  this  converted  legacy 
IBOR  as  a  continuation  of  the  previous  IBOR.  Option  1  leaves  no  uncertainty  or 
confusion as to the exercise of these regulatory powers and their legal consequences. The 
precise  regulatory  mandate  in  Option  1  provides  users  with  an  express  safe-harbour  or 
immunity offering protection from lawsuits.  

In terms of avoided cost of renegotiation for EU banks, Option 1, on account of the “flow 
through” principle that does not require any form of individual contract negotiations will 
potentially  result  in  savings  ranging  from  EUR  793  million  to  3.47  billion  per  bank, 
depending on the exposures of the relevant credit institution (the lower figure represents 
a mid-tier and the upper figure a large EU corporate lender).  

Option 1 would also reduce a potential and very approximately estimated small business 
burden  of  EUR  1.9  billion  incurred  in  renegotiating  their  USD  LIBOR  loans  and  debt 
arrangements maturing beyond 2021 in the Eurozone.  

The  legacy  rate  option  is  the  only  option  that  does  not  require  a  statutory  fall-back 
mechanism for the “tough legacy” contracts, as the original IBOR does not cease to be 
published,  but  will  be  published  by  the  same  administrator  under  the  same  name.  This 
option  is  therefore  the  most  straightforward  as  it  does  not  require  replacing  all  IBOR 
references in legacy contracts by a statutory fall-back provision in all jurisdictions whose 
laws govern those IBOR contracts (e.g., US, English, French or German contract laws). 
All other options, new authorization, exemption, etc. that rely on cessation of the existing 
IBOR would indeed face this issue. 

In terms of avoiding a contract termination scenario, Option 1 is the safest option because 
of  the  lower  litigation  risk  based  on  claims  of  contract  frustration  –  since  the  rate  is 
published by the same administrator under the same name. 

With  respect  to  potential  licence  fees  to  be  paid  upstream  of  producing  the  legacy  rate 
and which may therefore have repercussions on the “downstream” license fee applied to 
users of the legacy rate, the following considerations apply:  

(i)  Cost  and  charges  associated  with  the  administration  of  legacy  rates  depend  on 
whether  the  authorised  administrator  would  need  to  license  certain  input  data 
(e.g.,  risk-free  rates,  compounded  risk-free  term  rates,  forward  looking  risk-free 
rates)  or  whether  the  authorised  administrator  would  produce  all  the  required 
inputs under its own authority. 

(ii) It  would  also  be  relevant  whether  some  of  the  inputs  are  published  by  central 
banks  (the  FED  publishes  SOFR,  the  BoE  SONIA  and  the  ECB  €STR)  or 
whether the mandated legacy rate would require use of a compounded version of 
the risk-free rate (a “term equivalent” risk free rate) that is compiled by a private 
administrator,  such  as  Bloomberg,  the  legacy  rate  administrator  would  need  to 
pay a license fee for the “term equivalent” version RFR.   

(iii)Cost associated with the need to build a reserve fund to cover potential litigation 
risk  would  be  less  than  with  Option  1  as  the  authorisation  would  only  cover 
publication  in  the  EU.  But  while  an  authorisation  would  provide  a  “liability 

54 

 
 
shield”  against  EU  based  litigants,  the  same  rate  might  still  be  published  in  the 
United  States  where  such  protection  would  not  apply.  Therefore,  a  certain 
increase in fees to cover third country litigation cost might still be likely.  

SMEs 

Mostly  as  counterparties  to  business  loans  extended  by  financial  institution,  SMEs  are 
one of the special interest groups impacted by the presented policy options. As noted in 
the report, some $3.4 trillion of EU banks exposures can be attributed to business loans, 
however, no data on how much of that is attributable to SMEs is available – but certainly 
a  significant  part  of  it.  Since  SMEs  as  counterparties  to  these  contracts  are  of  various 
levels of sophistication, contracts vary in terms and there is no mechanism equivalent to 
ISDA protocol to enable en masse insertion of fall-back clauses, consent solicitation for 
the purpose of transitioning loans to risk free rates may prove to be challenging in case of 
SMEs. This is precisely why ensuring a mandatory legacy rate for tough legacy contracts 
plays  an  important  role  and  will  have  significant  positive  impacts  on  SMEs.  The 
replacement rate will ensure legal certainty for SMEs as to the applicable financing rate, 
which is an important  factor for their continued smooth operation, especially in  current 
circumstances  when  the  COVID  19  crisis  is  putting  at  risk  the  very  survival  of  many 
companies. 

Regulators 
Feedback received by ESMA41 and the UK FCA42 shows support for the empowerment 
of  competent  authorities  with  tools  to  minimise  the  potential  disruption  caused  by  the 
cessation of an IBOR, including tools that could enable the use of an alternative formula 
for the retiring benchmark’s calculation that protects the economic position of contractual 
parties while the critical benchmark is retired. 

The main impact would be on the competent authority charged with the conversion of a 
discontinued  IBOR  rate  into  a  legacy  rate  in  cooperation  with  the  administrator,  since 
that  authority  would  be  taking  on  the  responsibility  to  mandate  the  appropriate 
methodology  for  the  calculation  of  the  legacy  rate.  As  shown  in  Annex  4.1,  all  of  the 
proposed alternative  reference rates are based on a methodology which is based on the 
overnight  (nearly)  risk-free  rates.  In  addition,  panel  bank  IBORs  are  published  for 
multiple currencies and various maturities (the most commonly used  LIBOR tenors are 
for example one, three, and six months). An additional complication in determining the 
appropriate legacy rate is that the overnight risk free rate for USD borrowing (SOFR) is a 
secured  rate  and,  in  consequence,  does  not  comprise  a  credit  sensitive  component 
reflective of banks’ credit risk43. Under this option, the decision on determining the credit 
spread  equating  the  nearly  risk-free  overnight  rate  to  the  discontinued  credit-sensitive 
rate  would  also  rest  with  the  regulator;  the  benchmark  administrator  will  only  need  to 
publish  it.  Leaving  such  discretion  to  the  regulator  is  consistent  with  existing  Article 
23(6)(d)  BMR  which  allows  the  regulator  to  apply  a  (non-specified)  methodology 
change. 

41 ESMA response to the Benchmark review public consultation launched by the European Commission in 
October  2019:  https://www.esma.europa.eu/press-news/esma-news/esma-responds-european-commission-
consultation-benchmark-regulation-review 
42  UK  FCA  feedback  to  the  Roadmap  for  the  BMR  Review  published  by  the  European  Commission  in 
March 2020 https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12268-Review-of-the-
Benchmark-Regulation/F512186. 
43 Secured rates, being overnight and collateralised by US treasuries, have a no credit component at all.  

55 

 
 
                                                           
However,  it  cannot  be  excluded  that  the  regulator’s  decisions  about  the  mandated 
methodology  for  the  conversion  of  the  benchmark  would  not  give  rise  to  litigation  for 
misuse or abuse of discretionary powers. The risk of legal  challenge equally holds true 
where  ESMA  would  be  in  charge  of  designing  the  legacy  rate,  especially  taking  into 
consideration the case law stemming from Meroni judgement44, which set limitations on 
the margins of discretion that can be exercised by European agencies. 

Another risk for the competent regulator that is specific to  Option 1 is that the relevant 
administrator  might  seek  to  withdraw  from  the  process  of  designing  and  ultimately 
publishing the legacy rate, arguing that the public sector can best reduce litigation risk by 
assuming itself the publication of such a rate. The risk-free overnight rates published by 
central  banks  can  be  cited  as  examples  for  the  public  sector  publishing  benchmarks 
themselves.  

In order to mitigate this “withdrawal” risk, Option 1 might have to provide for a process 
whereby  the  administrator  is  permitted  to  withdraw  from  the  process  of  designing  the 
legacy rate and the competent regulator permitted to appoint a replacement or arrange for 
publication  of  the  rate  itself.  The  conditions  for  such  a  withdrawal  would  have  to  be 
carefully  structured  and  would  require  the  mandated  administrator  to  set  out  cogent 
reasons for withdrawal.45. 

Central banks 

Central  banks  generally  take  care  of  money  markets  within  their  own  jurisdictions. 
Central banks often use interbank rates to gauge the transmission of monetary policy. As 
a  tool  to  assess  whether  monetary  policy  is  effective,  risk-free  rates  are  more  suitable 
than  rates  that  reflect  liquidity  and  credit  risk.  Therefore,  central  banks  would  not 
generally be favourable to large-scale use of credit sensitive reference rates. In addition, 
the FSB takes  the view  that corporate borrowers should not  be impacted by  IBOR  rate 
spikes in times of crisis, especially since banks have more “crisis-proof” stable funding 
sources, such as deposits or long term debt that does not reference an IBOR rate.  

However,  the  replacement  rate  would  be  confined  to  legacy  contracts  and,  therefore, 
would represent a temporary reference rate with a ring-fenced user group. Therefore, and 
unless they are acting in the capacity of competent authorities or as bank regulators, the 
impacts  of  the  continuity  option  on  the  ECB  or  the  European  national  central  banks 
should therefore be limited. 

When Central Banks act as bank supervisors they would be involved and consulted upon 
in  the  pre-cessation  procedure  by  the  competent  authority.  In  case  of  EU  critical 
benchmarks, central banks acting as bank supervisors would also be part of the decision 
making process as part of the college of supervisors46.  

Mortgage holders 

44 C-9/56 and C-10/56 (Meroni v High Authority [1957/1958] ECR 133) 
45 For example, as to why it is unable to effect the changes to the IBOR rate required by the regulator, why 
it considers that it cannot continue publishing the benchmark with the changed methodology on a 
sustainable basis or why it considers that to continue do so would result in material risk to the administrator 
46 The need for bank supervisors to be part of the non-representativeness assessment was raised also in the 
feedback received to the public consultation by single national competent authorities (French, Spanish and 
Danish). 

56 

 
 
                                                           
All  options,  if  based  on  risk-free  rates  with  an  added  credit  spread  will  have  a  slight 
“calculation”  disadvantage  for  private  mortgages.  Retail  user  rates  are  invariably  based 
on a “forward looking” calculation methodology. Retail users rely on the fact that their 
monthly mortgage payments are predictable and hence the amount of the next instalment 
of their mortgage repayment should be known well in advance of the payment date. As it 
is expected that, in designing the IBOR bridging rate and defining its characteristics, the 
national  competent  authorities  and/or  the  index  administrator  would  align  themselves 
with  the  fall-back  rate  and  methodologies  proposed  by  the  different  private  sector 
working  groups,  there  is  a  risk  that,  for  the  sake  of  simplicity,  these  legacy  rates  will, 
across  all  asset  classes,  including  mortgages,  be  calculated  by  compounding  the  daily 
risk-free rates "in arrears" to create a term rate. As compounding can only be done at the 
end  of  the  reference  period,  the  precise  interest  payment  will  not  be  known  before  the 
payment date. However, there are certain backward-looking methodologies, such as last 
reset,  that  calculate  due  interest  based  on  the  observation  period  preceding  the  interest 
rate period, which consequently allow mortgage holders to know the instalment of their 
mortgage repayment well in advance of the payment date.. Nevertheless, applying these 
calculation  methodologies  to  mortgages  comes  with  challenges  as  the  different 
methodology  used  to  determine  the  rate  applicable  to  the  hedging  instrument  would 
result in hedging inefficiencies or even discontinuation of the hedging relationship. 

The  socio-economic  impacts  on  mortgage  holders  under  this  policy  option  would  be 
positive, since this option would provide them with legal certainty as to the benchmark 
rate  their  contracts  would  fall  back  to  upon  specified  trigger  event.  Legacy  LIBOR 
denominated  mortgages  do  not  have  suitable  contractual  fall-backs  in  place  to 
appropriately  accommodate  the  cessation  of  LIBOR,  opening  mortgage  holders  to 
economic uncertainty about the applicable interest rate upon LIBOR cessation. The same 
is  true  for  other  IBOR-denominated  mortgages  which  fall  into  the  category  of  tough 
legacy contracts.  Given  the robust powers conferred to  the regulator, this option would 
ensure that tough legacy mortgage contracts transition to an appropriate alternative rate, 
which  would  represent  an  economic  analogue  to  the  discontinued  benchmark,  ensuring 
that the impacts on financial obligations of the mortgage holders are limited. However, it 
should  be  noted  that  the  fact  that  mortgage  holders,  in  most  case  where  backward 
methodologies would be used for the calculation of the applicable monthly interest rate, 
would not know their mortgage repayment amounts at the beginning of the interest rate 
period may make it harder to manage their personal finances. 

10.1.2  Option 2: Simplified authorisation for a temporary legacy rate 

Contributors 

The  impacts  on  the  contributors  under  this  option  are  analogous  to  the  ones  detailed 
under  option  1.  As  all  potential  IBOR  replacement  rates,  except  for  the  permanent 
replacement rate, will no longer be based on panel bank submissions, all of the mooted 
(risk  free  rate  plus  a  credit  spread)  options  are  a  net  positive  for  current  IBOR 
contributors – both in terms of costs saved and liabilities avoided. 

Administrators 

Option  2  provides  some  degree  of  legal  certainty  to  the  administrator  that  will  need  to 
seek  an  authorisation  in  order  to  supply  a  temporary  legacy  rate.  This  option  provides 
some clarity as to the issues that need to be considered before authorising a legacy rate, 
such as sourcing of necessary input data, developing a new calculation methodology, and 
establishing surveillance procedures and publication tools.  

57 

 
 
Close discussions between the administrator and the competent regulator will be crucial 
in discussing any of these proposed legacy rates prior to authorisation.  Option 2 allows 
for  some  degree  of  “forward-looking”  engagement  between  the  regulator  and  the 
potential administrator, but the mandatory reconciliation process is necessarily confined 
to the organisation of the IBOR cessation and the precise timing on when the withdrawal 
of  the  IBOR  authorisation  would  take  effect.  The  potential  administrator  seeking 
authorisation  might  also  not  be  identical  with  the  administrator  involved  in  the 
reconciliation process.  

Option  2  provides  less  up-front  clarity  on  the  required  methodology  for  an  authorised 
legacy rate, obliging the administrator to propose its own ideas on sourcing and agreeing 
data provision arrangements with third party providers (where necessary). 

Option 2 would ensure that an administrator which is authorised to publish an IBOR with 
a  changed  methodology  (or  even  a  changed  underlying  economic  reality),  is  insured 
against  compliance-related  litigation  on  issues  such  as  input  data  or  appropriateness  of 
the methodology.  

Since the regulator (acting in accordance with its statutory empowerments) authorises the 
methodology  underpinning  the  temporary  legacy  rate,  the  administrator  would  face 
reduced liability or litigation risk in publishing the mandated legacy rate. 

Users 

The  legacy  rate  is  designed  as  a  “single  replacement  rate”  for  a  discontinued  IBOR.  A 
single replacement rate would imply that there is one methodology which determines the 
rate. This would ensure that the fall-back rate is calculated in the identical manner across 
all asset classes and applies to all legacy contracts, regardless of the “governing law” of 
the contract. Option 2, as the regulator might receive different applications form different 
administrators  of  a  potential  legacy  rate,  might  not  be  able  to  maintain  the  design  of  a 
“single replacement rate”.  As there are no legal powers in the BMR, or in any other law 
governing authorisation requirements, to apply quantitative restrictions on the amount of 
authorisations granted for a particular economic activity or sector, there is no remedy for 
multiple legacy rates being published. This makes Option 2 unsuitable as a fall-back for 
many types of agreements, such as multicurrency loan agreements.  

Users would also need time to assess and address any consequential changes in their risk 
positions and operations, and any potential contractual and legal impact. Where a change 
to  the  underlying  economic  reality  of  a  benchmark  is  proposed  (i.e.  the  rate  no  longer 
measures current unsecured bank funding costs but rather changes in risk free rates plus a 
fixed historical bank lending spread), the impact is likely to be greater, both in terms of 
economic  risks,  operations  and  legal  contracts,  and  so  will  require  more  time  for  an 
administrator and users of a benchmark to assess and address this.  

The considerations on operational costs for users, discussed under option 1, are also valid 
in the option 2 scenario. 

Option  2  allows  for  an  administrator-led  public  consultation  on 
the  material 
characteristics of a legacy rate. Option 2 could provide potential users with some up-front 
clarity  as  to  legacy  rate’s  input  data,  calculation  methodology,  and  applicable 
surveillance procedures and publication tools. Option 2 might not, however, ensure that 
the administrator-led consultation would directly translate into a seamless “flow through” 

58 

 
 
transition path from the previous IBOR to its legacy rate. This is because the benchmark 
that  results  from  the  consultation  would  still  need  to  seek  authorisation  and  the 
regulator’s  “pre-cessation”  notice  in  Option  2  is,  by  necessity,  silent  on  the 
characteristics of a potential successor rate.  

Option 2 would also bring some transparency for users and would ensure that users have 
input  into  the  IBOR  replacement  process.  The  consultation  organised  by  a  potential 
administrator would allow focus on specific aspects of the proposed changes such as, for 
example, risk implications and operational implications, or key variables in a calculation.  
With  Option  2  market  participants  will  have  transparency  and  be  able  to  assess  the 
suitability of the replacement benchmark. 

Option 2 would require a statutory fall-back mechanism for the “tough legacy” contracts, 
as  the  original  IBOR  will  cease  and  be  replaced  by  a  new  legacy  rate.  Option  2  is 
therefore not able to ensure that the authorised legacy rate automatically “flows through” 
into legacy contracts.  To achieve the intended result, Option 2 requires a statutory fall-
back  provision  in  all  jurisdictions  whose  laws  govern  those  IBOR  contracts  (e.g.,  US, 
English, French or German contract laws).  

The above referenced potential cost savings for both corporate banks and the EU small 
business  sectors  are  therefore  much  more  tentative  and  uncertain  with  Option  2  when 
compared with the “flow through” approach in Option 1.  

In terms  of  avoiding a  contract  termination scenario, Option  2 is  not  very  stable as the 
authorised  legacy  rate  is  potentially  published  with  a  time  gap  after  cessation  of  the 
IBOR,  which  entails  a  high  degree  of  litigation  risk  based  on  claims  of  contract 
frustration.  

With respect to potential licence fees to be paid upstream of producing the legacy rate as 
part  of  an  authorisation,  and  which  might  have  repercussions  on  the  “downstream” 
license fee charged to users, similar consideration as those made in the context of Option 
1 would apply.  

SMEs 

The considerations under option 1 are also valid here, with a net positive effect on SMEs. 
Under this option the regulator has fewer influence over the design of the legacy rate and 
intervenes at the end of the process only to authorize the legacy benchmark. This means 
the  regulator  has  less  power  to  cater  to  any  special  needs  of  SMEs  in  designing  the 
legacy rate methodology, if any would arise. 

Regulators 

Regulators might come under pressure to mandate a legacy rate that caters to the needs 
and requirements of individual asset classes, such as derivatives, debt and loan markets. 
For example, there are certain sectors and borrowers in the syndicated loan market which 
rely  on  forward-looking  term  rates  (e.g.  the  export  finance  market,  trade  finance  and 
small  borrowers  without  treasury  functions)  and  for  which  the  backward  looking 
methodology  recommended  by  International  Swaps  and  Derivatives  Association  for 
derivatives would not be suitable. 

Any potential litigation risk could be effectively mitigated if the regulator aligns with the 
fall-back  rates  chosen by  market  participants  themselves. This  would, however,  require 

59 

 
 
that the private sector working groups that are currently considering term structures for 
the  new  risk-free  reference  rates  would  indeed  agree  on  asset  class  specific  term 
structures. 

The  main  advantage  of  the  authorisation  option  is  that  the  regulator(s)  could  authorise 
several  asset-specific  fall-back  rates  to  cater  for  the  particular  needs  of  different  users. 
The  disadvantage  of  several  fall-back  rates  is  that  it  impedes  standardised  and  liquid 
hedging tools that hitherto applied across asset classes. 

Another advantage for regulators with Option 2 is that the competent regulator does not 
have to deal with the “withdrawal” risk associated with Option 1.  

Central banks 

The impacts on central banks under this option are analogous to the ones detailed under 
option  1.  Unless  they  are  acting  in  the  capacity  of  bank  regulators,  the  impacts  of  all 
three options on the ECB or the European national central banks should be limited. The 
ECB  or  national  central  banks  would  not  be  involved  in  providing  nor  authorising  (or 
otherwise approving) the successor rate to IBOR. 

Mortgage holders 

Since under this option, the regulator might have more leeway to create product-specific 
rates best adapted to a given group of assets, this may result in legacy rate better suited 
for the needs of mortgage holders.  

Such  a  rate  would  likely  be  based  on  a  forward-looking  methodology  with  payments 
known at the beginning of the interest period. Individual mortgage holders might indeed 
find it difficult to adapt to a backward looking rate where payments are only clear at the 
end  of  the  reference  period.  However,  mandating  such  an  option  would  depend  on  the 
existence of sufficiently liquid markets in IBOR derivatives, as data therefrom would be 
used  as  input  for  calculating  the  legacy  rate  using  the  forward-looking  methodology. 
Appropriate levels of liquidity in those markets have still not been reached and therefore 
it  is  questionable  whether  this  theoretical  advantage  could  indeed  materialize  in  the 
IBOR phase out process, should this policy option be pursued. However, there are certain 
backward-looking methodologies, such as last reset, which are consistent with the need 
of mortgage holders to know the interest rate at the beginning of the period, that could 
also be considered by the competent regulator in exercising its conversion powers. 

Regarding  the  socio-economic  impacts  on  mortgage  holders,  the  considerations  set  out 
under option 1 are equally valid under this option – the foreseen procedure for the orderly 
wind-down of critical benchmark would benefit mortgage holders by removing the legal 
and economic uncertainty for tough legacy mortgage contracts with no suitable fallback 
rate upon cessation of IBOR rates.  

10.1.3  Option 3: Exemption for a temporary legacy rate 

Contributors 

The  impacts  on  the  contributors  under  this  option  are  analogous  to  the  ones  detailed 
under  option  1.  As  all  potential  IBOR  replacement  rates,  except  for  the  permanent 
replacement rate, will no longer be based on panel bank submissions, all of the mooted 
options are  a net positive for current  IBOR contributors  – both  in  terms  of costs saved 
and liabilities avoided.  

Administrators 

60 

 
 
Option 3 provides no legal certainty to the administrator that will publish a legacy rate of 
its own design pursuant to a statutory exemption. Option 3 provides no prior clarity as to 
the issues that need to be considered before publishing a legacy rate, such as sourcing of 
necessary  input  data,  developing  a  new  calculation  methodology,  and  establishing 
surveillance procedures and publication tools.  

Under option 3, there would be no “forward-looking” engagement between the regulator 
and  a  future  benchmark  administrator;  the  mandatory  reconciliation  process  would  be 
confined  to  various  operational  issues  connected  to  the  cessation  of  IBOR  and 
determining  the precise  moment  as of which the withdrawal  of the  IBOR authorisation 
would take effect. 

Option  3  provides  no  up-front  clarity  on  the  required  methodology  for  an  authorised 
legacy rate, obliging the administrator to assume sole responsibility on data sourcing and 
agreeing data provision arrangements with third party providers (where necessary). 

This  option  also  does  not  provide  the  administrator  with  any  insurance  against 
compliance-related  litigation  on  issues  such  as  input  data  or  appropriateness  of  the 
methodology.  

Users 

The  legacy  rate  is  designed  as  a  “single  replacement  rate”  for  a  discontinued  IBOR.  A 
single replacement rate would imply that there is one methodology which determines the 
rate. This would ensure that the fall-back rate is calculated in the identical manner across 
all asset classes and applies to all legacy contracts, regardless of the “governing law” of 
the contract. Since under option 3 various administrators may publish different versions 
of  a  legacy  rate  under  the  new  statutory  exemption,  this  would  likely  result  in 
compromising  the  principle  of  a  “single  replacement  rate”.  This  makes  Option  3  less 
suitable  as  a  fall-back  for  certain  types  of  contracts,  such  as  multicurrency  loan 
agreements.  

Option 3 does not require any type of public consultation on the material characteristics 
of a legacy  rate, although a potential  administrator may voluntarily do so.  In that  case, 
Option 3 could provide potential users with some up-front clarity as to legacy rate’s input 
data,  calculation  methodology,  and  applicable  surveillance  procedures  and  publication 
tools. However, Option  3 does not  ensure that the administrator-led consultation would 
directly  translate  into  a  seamless  transition  path  from  the  previous  IBOR  to  its  legacy 
rate.  This  is  because  the  benchmark  that  results  from  the  consultation  might  still  be 
published with a time lag after the expiry of the previous IBOR rate in accordance with 
the  timelines  set  out  in  the  regulator’s  “pre-cessation”  notice.  As  in  Option  2,  the  pre-
cessation  notice  would  be,  by  necessity,  silent  on  the  characteristics  and  go-live  of  a 
potential successor rate. In conclusion, the reliance on solely market forces to produce a 
temporary  legacy  rate,  without  involvement  of the  regulators,  may  result  in  suboptimal 
user participation in the rate design process and differential legacy rate offerings. Users 
may find it hard to navigate such a post-cessation landscape. 

Option 3 would require a statutory fall-back mechanism for the “tough legacy” contracts, 
as  the  original  IBOR  will  cease  and  be  replaced  by  a  new  legacy  rate.  Option  3  is 
therefore not able to ensure that the authorised legacy rate automatically “flows through” 
into legacy contracts. To achieve the intended result, Option 2 requires a statutory fall-
back  provision  in  all  jurisdictions  whose  laws  govern  those  IBOR  contracts  (e.g.,  US, 
English, French or German contract laws).  

61 

 
 
Potential  for  renegotiation  cost  savings  for  both  corporate  banks  and  the  EU  small 
business sectors is therefore much more modest with Option 3 as compared to the “flow 
through” approach in Option 1.  

In terms  of  avoiding a  contract  termination scenario, Option  3 is  not  very  stable as the 
authorised  legacy  rate  is  potentially  published  with  a  time  gap  after  cessation  of  the 
IBOR,  which  entails  a  high  degree  of  litigation  risk  based  on  claims  of  contract 
frustration. 

As opposed to the other two options, the exemption option requires that the co-legislators 
themselves  decide  on  the  duration  of  the  exemption.  Previous  BMR  experience  with 
transitional  provisions  enshrined  in  primary  legislation  demonstrate  that  it  is  very 
difficult  to  establish  appropriate  durations  in  a  legislative  instrument.  This  exemption 
option would therefore create an unstable situation for users. 

With respect to potential licence fees to be paid upstream of producing the legacy rate as 
part  of  an  authorisation,  and  which  might  have  repercussions  on  the  “downstream” 
license  fee  to  be  paid  by  users,  similar  consideration  as  those  made  in  the  context  of 
Option 2 would apply. 

Finally, the considerations on operational  costs for users, discussed under option 1, are 
also  valid  in  the  option  3  scenario,  with  an  important  addition.  Since  the  legacy  rate 
under option 3 would not have to be BMR compliant, this could theoretically allow for 
more divergence from the fall-back rates proposed by the private industry groups.   

SMEs 

The considerations under option 2 are also valid here. 

Regulators 

Under  this  option  the  regulator  does  not  intervene,  leaving  the  entire  issue  of  how  to 
structure an appropriate legacy rate to the private sector. While advantageous in terms of 
flexibility, this option gives the regulator no control with respect to the methodology or 
underlying data used to calculate the legacy rate. Since this option entails no involvement 
of  the  regulator  in  the  establishment  of  the  methodology  underpinning  the  rate,  the 
regulator cannot ensure emergence of a single replacement rate that presents the optimal 
solution for all market participants in their entirety.  

An additional disadvantage of the exemption approach is the lack of legal certainty as to 
the  time  during  which  the  rate  is  published.  As  the  regulator  does  not  intervene  at  all, 
there would be no legal means to compel an administrator or other entity that publishes 
the exempt rate to maintain publications throughout the entire duration of the legacy rate 
exemption specified in the BMR. The exemption option would therefore seem too fragile 
and prone to considerable "cessation risk" itself. 

On the other hand, no liability for the successor rates published under an exemption is a 
positive  factor  for  regulators.  On  the  negative  side,  regulators  would  be  seen  as  not 
contributing to the resolution of the “tough legacy” issue. 

62 

 
 
 
Another advantage for regulators with Option 2 is that the competent regulator does not 
have to deal with the “withdrawal” risk associated with Option 1.  

Central banks 

The impacts on central banks under this option are analogous to the ones detailed under 
option  1.  Unless  they  are  acting  in  the  capacity  of  bank  regulators,  the  impacts  of  all 
three options on the ECB or the European national central banks should be limited. The 
ECB  or  national  central  banks  would  not  be  involved  in  providing  nor  authorising  (or 
otherwise approving) the successor rate to IBOR. 

Mortgage holders 

As  detailed  under  option  1,  this  option  may  result  in  a  suboptimal  rate  calculation 
methodology applied to mortgages referencing IBORs. Indeed, all of the options, if based 
on  RFR  compounded  in  arrears  (backward-looking  methodology)  with  an  added  credit 
spread will have negative impacts on private mortgages. 

With regards to socio-economic impacts on mortgage holders, similar to option 1 and 2, 
the net effect of option 3 would be positive where it the procedure for the .  

10.2 Loss of EU-based risk management tools  

The  main  stakeholders  affected  by  the  loss  of  EU  based  foreign  exchange  hedging 
contracts fall into two broad categories: the buy side and the sell side.  

The  sell  side  consists  of  the  large  EU  investment  banks  that  sell  the  foreign  exchange 
forward contracts and therefore sell protection to investors.  

The  buy  side  comprises  entities  (mainly  EU  corporates)  that  are  active  in  business  in 
non-EU  countries  and  undertake  foreign  exchange  spot  transactions.  Those  entities  are 
therefore exposed to the risk of convertibility and fluctuation of third country currencies 
and need to manage such risk buying protection against exchange rate volatility. The buy 
side comprises corporate accounts, asset managers that invest in foreign currency assets 
and any other trading account that is exposed to currency volatility, such as hedge funds, 
proprietary traders, commodity traders and also retail accounts.  

One  of  the  options,  Option  1,  which  rely  on  contract  authorisation,  also  impact 
regulators. 

10.2.1  Option 1: Contract authorisation  

Sell side 

EU dealer banks offering derivatives for currency hedging would be positively impacted 
by a “per contract” authorisation rule. This authorisation, if exercised to the full, would 
allow  them  to  continue offering  new  forward  contract  or  roll  over  existing  contracts  to 
their buy side clients, including forward contracts traded on public trading venues, also 
after the end of the transitional period; in addition, they could continue to engage in new 
forward  contracts  to  hedge  their  own  exposure  in  foreign  currencies,  including  with 
forward contracts traded on public trading venues.  

However,  under  this  specific  option,  EU  dealer  banks  would  need  to  obtain  a  “per 
contract”  authorisation  before  offering  the  forward  contract.  This  would  create  an 

63 

 
 
additional  administrative  burden  as  previously  no  authorisation  was  required  for  them 
when offering forwards, either as an internaliser or on a regulated trading venue. Also, if 
the  grant  of  authorisations  would  be  slow  or  not  keep  up  with  the  emergence  of  new 
types of forward contracts, this time lag might introduce inefficiencies in hedging foreign 
exchange risk. This procedure may therefore entail costs that would make their forward 
contracts  more  expensive  and  less  competitive  compared  to  those  of  non-EU 
counterparties not subject to similar requirements. Only part of these costs would be in 
fact offset by the savings (shared by all the other options) for EU dealers who would no 
longer have to verify on a case by case basis whether currency spot rates referenced in 
their forward contracts have been recognised or endorsed for use in the Union. 

Buy side 

Under this option, the EU buy side (mainly EU corporates active in business in non-EU 
countries  exposed  to  fluctuations  of  such  third  country  currency)  would  be  positively 
impacted.  This  option  would  allow  them  to  continue  hedging  with  forward  contracts 
offered by EU banks and/or traded on an EU exchange, making use of the same range of 
instruments and counterparties as they are currently doing. The downside of this option is 
that  authorisations  might  not  be  able  to  keep  up  with  both  demand  and  supply  of  new 
forward contracts. Furthermore, authorisation processes can be lengthy and would likely 
increase  the  cost  of  hedging  instruments  offered  by  EU  banks  as  compared  to  the 
offerings  by  non-EU  banks  (which  would  not  have  to  go  through  such  authorisation 
procedure). The new costs might work as a disincentive for EU entities to remain in the 
forward  hedging  business,  potentially  also  reducing  the  efficiency  of  their  own  risk 
management.  

EU Regulators 

This option puts a considerable burden on the regulators competent for the supervision of 
the relevant listing venues of the foreign exchange hedging contracts (be they regulated 
markets  or  multilateral  trading  platforms)  which  would  have  to  exercise  the  new  BMR 
power to authorise individual listed contracts. Considering that the current supervision of 
trading  venues  does  not  comprise  the  authorisation  of  individual  contracts  traded  on  a 
venue, this policy choice would therefore require investments by regulators in acquiring 
expertise to execute the new task. Trading venue regulators are not currently equipped to 
deal with individual contract authorisations.  

On the other hand, this  current  lacuna in  regulatory  expertise could  be remedied as the 
regulator  should  be  required  to  take  into  account  in  its  scrutiny  some  basic  contract 
features,  such  as  whether  the  foreign  exchange  hedging  contracts  will  refer  to  a 
sufficiently  robust  waterfall  of  settlement  rate  sources  or  options  in:  (i)  a  primary  rate 
source;  (ii)  non-primary  rate  sources,  including  "fall-back  rates",  as  an  orientation  on 
whether a contract should be authorised or not.  

10.2.2  Option 2: Contract exemption 

Sell side 

Considering  that  this  exemption  option  avoids  the  risk  of  option  1  that  contract 
authorisations  cannot  keep  pace  with  supply  and  demand  for  hedging  tools,  EU  dealer 
banks offering derivatives for currency hedging would be even more positively impacted 
by  new  rules  exempting  traded  contracts  from  the  requirement  to  use  BMR-compliant 
rates for hedging from risk of currency volatility. The amendment would allow them to 
continue  offering  hedging  contracts  via  public  trading  venues  to  the  buy  side  after  the 

64 

 
 
end of the transitional period; in addition, they could continue use hedging tools to hedge 
their own exposure in foreign currencies, including on public trading venues, also  after 
the end of the transitional period.  

Without scrutiny by a competent authority over BMR compliance of rates referenced in 
such  contracts47,  however,  EU  Banks  might  have  to  support  the  cost  to  reinforce  their 
internal  risk  management  procedure  in  order  to  ensure  the  financial  stability  of  their 
balance  sheet  would  not  be  negatively  impacted  by  an  excessive  exposure  to  foreign 
exchange risk in those third countries’ currencies. Part of these costs would however be 
offset  by the savings (shared by  all the other options) realized by no longer needing to 
check whether the currency spot rates used as reference in their hedging contracts have 
been  duly  recognised  or  endorsed  for  use  in  the  Union.  The  additional  cost  would 
certainly  be  outweighed  by  the  advantage  of  having  deeper  liquidity  pools  of  forward 
exchange  contracts  and  contract  counterparties  that  could  all  trade  forward  contracts 
among each other to hedge their respective currency exposures. 

Buy side 

Under  this  option,  the  EU  buy  side  would  be  very  positively  impacted.  The  contract 
exemption  would  allow  them  to  continue  using  EU-traded  contracts  to  hedge  their 
exposure in foreign currencies also after the end of the transitional period, making use of 
the  same  instruments  and  counterparties  as  they  are  currently  doing.  Considering  that 
under this option, EU banks would not have to incur further costs under this option, the 
price of the protection from the currency risk would remain approximately unvaried.  

Regulators 

This option would not have impacts on competent authorities as they would not have a 
role in determining the scope of the exemption for hedging contracts. An advantage for 
regulators would be that they would have fewer recognition/endorsement applications for 
foreign exchange spot rates to process (and decide on their BMR compatibility). 

10.2.3  Option 3: Rate exemption 

Sell side 

EU dealer banks offering forward contracts  for currency hedging as well as investment 
funds and hedge funds would be very positively impacted. The amendment would allow 
them  to  continue  offering  all  existing  forward  contract  to  hedge  foreign  exchange  rate 
fluctuations on public trading venues also after the end of the transitional period. In this 
respect, option 3 is more future-proof than options 1 and 2. 

On the negative side, the availability of third country rates would depend on the scope of 
the  exemption  as  formulated  by  the  co-legislators  and  any  adaptation  might  require 
(again) changing the primary legislation.  

Buy side 

EU end clients of third country foreign exchange benchmarks would be very positively 
impacted  by  the  policy  outcomes  of  this  option.  The  amendment  would  allow  them  to 
continue entering into forward contracts referencing spot exchange rates with EU banks 

47 To be noted that since this option would not force the sell side to move to (less transparent) OTC trading 
and thus outside of the current scope of BMR, it would allow competent authorities to have more visibility 
over these instruments as their trading would remain on “lit” markets  

65 

 
 
                                                           
and trade these contracts with other EU counterparts on transparent trading venues.  The 
high  levels  of  liquidity  that  currently  characterise  the  EU  forward  markets  for  non-
convertible currencies would be preserved.  

Regulators 

This option would not have impacts on competent authorities as they would not have a 
role  in  determining  the  scope  of  the  exemption  for  currency  rates.  However,  lower 
numbers  of  recognition/endorsement  applications  for  foreign  exchange  spot  rates  to 
process  (and  decide  on  their  BMR  compatibility)  would  reflect  positively  on  their 
workload. 

11  HOW DO THE OPTIONS COMPARE? 

11.1 Disorderly IBOR transition  

In  terms  of  design  features,  it  is  of  essential  that  all  temporary  IBOR  successor  rates 
(Options  1  to  3)  will  very  likely  switch  to  the  same  underlying  (risk  free  rates  plus  a 
historic  spread)  as  a  basis  to  establish  the  synthetic  IBOR  rate.  It  is  essential  that  all 
IBOR  exposures,  be  it  derivatives,  money  markets,  bonds  or  loans,  in  a  particular 
currency  revert  to  the  same  replacement  rate  in  case  the  relevant  currency  IBOR  is 
discontinued.    The  permanent  replacement  option,  on  the  other  hand,  would  be  a  total 
game changer as it introduces a customised bank yield rate that will certainly provide an 
alternative  for  the  “niche”  market  of  bank  funding.  The  bank  yield  rate  might  be  less 
suitable  as  an  “across-the-board”  replacement  rate  that  also  comprises  derivatives  and 
corporate debt.  

In  terms  of  efficiency  to  achieve  the  stated  aim  –  creating  more  legal  certainty  as  to 
valuations of tough legacy contracts – the mandated temporary legacy rate is the most 
straightforward,  as  it  avoids  considerable  debate  on  statutory  powers  to  embed  the 
modified  IBOR  in  legacy  contracts.    All  alternative  options  on  temporary  legacy  rates 
would be saddled with the issue that the legacy rate is not a legal continuum to the IBOR 
rate it intends to replace, albeit for a limited time-period and ring-fenced to a pre-defined 
user community (parties to tough legacy contracts).  

The main issue with a statutory fall-back mechanism in the BMR is that such tool might 
cause  considerable  legal  debate  and  involve  the  need  to  adopt  statutory  fall-back 
provisions  in  several  European  Member  States.  Inserting  the  statutory  fall-back  as  a 
corollary of the BMR reform might be easier, but might also expose the EU institutions 
to arguments of taking action that is ultra vires by adopting rules pertaining to contract 
law.  

The main advantage of the authorised temporary legacy rate is that this authorisation 
would  not  be  tied  to  the  original  administrator  of  the  critical  benchmark,  giving  the 
regulator more choice in who should publish the legacy rate.  The authorisation approach 
would  also  provide  regulators  from  jurisdictions  different  than  that  where  the  original 
authorisation was granted powers to authorise publication of a legacy rate (e.g., if there 
was a particularly pronounced user dependency in that jurisdiction).  This option would 
therefore score high with those that are concerned by regulatory autonomy, hence most 
likely  jurisdictions  with  a  large  user  community,  but  not  the  home  country  of  the 
benchmark administrator. Another advantage of the authorisation approach would also be 
that  the  competent  supervisory  authority  could  determine  and,  if  necessary,  recalibrate 

66 

 
 
 
the  duration  of  the  authorisation  or  even  consider  authorising  customised  replacement 
rates for different asset classes.  

The  main  disadvantage  of  the  “authorisation”  approach  would  be  that  it  opens  the 
Pandora  box  of  whether  the  BMR  follows  the  “administrator”  or  the  “per  benchmark” 
approach.  Switching,  only  because  of  tough  legacy  contracts,  to  a  “per-benchmark”  to 
authorisation might have unintended design consequences for the entire BMR structure.  
These  might  only  emerge  in  practical  application  and  would  then  raise  the  need  for 
additional  BMR  amendments,  which  makes  the  authorisation  approach  not  entirely 
“future  proof”,  leading  to  the  potential  need  to  amend  the  BMR  again,  once  the  full 
consequences  of  the  switch  to  “per  benchmark”  authorisations  emerge.  In  addition, 
authorising  several  legacy  rates  per  asset  class  would  not  result  in  cross-asset  class 
hedging capacities being available to the same extent than with a single replacement rate. 

The  exemption  option  would  be  more  future  proof  as  the  scope  and  duration  of  the 
exempt  benchmark  would  be  set  out  in  the  statute  itself.  As  the  exemption  for  a 
temporary  IBOR  legacy  rate would be limited in time, the “per benchmark” exemption 
would not set a precedent for the remainder of the rule-book.  

A major disadvantage of the exemption approach would be the need for the legislator to 
decide on a statutory time-line during which publication of the bridging rate was exempt 
from BMR compliance while still being published. Previous experience with transitional 
provisions  enshrined  in  the  BMR  (for  third  country  benchmarks)  demonstrate  that  it  is 
very difficult to establish appropriate duration for temporary derogations in a legislative 
instrument.  Determining the duration of a derogatory rules is usually better vested in the 
implementing measures taken by the competent regulators. An additional disadvantage of 
the  exemption  approach  is  that  there  would  be  no  regulatory  tools  to  compel  an 
administrator  or  other  entity  that  publishes  the  exempt  rate  to  maintain  publication 
throughout  the  period  necessary  to  wind  down  tough  legacy  stock  (a  temporary 
exemption could no longer rely on mandatory contribution or mandatory administration 
powers).  

Table 5 – Comparison of the IBOR options 

Legal 
certainty for 
all LIBOR 
contract 
parties 

Effectiveness 
Better balance 
sheet risk 
management for 
EU banks  

Avoidance of 
moral hazard 

Efficiency  Coherence   Total 

0 
0 

0 
++ 

0 
++ 

0 
++ 

0 
+++ 

Baseline 
Option1 
Mandating 
conversion 
into a legacy 
rate 
Option2  
Authorisation 
of a legacy 
rate 
Option 3 
Exemption of 
legacy rate 
Note: Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): +++ strongly 
positive (score 3); ++ very positive (score 2); + positive (score 1). For the total, due to their importance, the 
Effectiveness criteria are weighted double.  

++ 

++ 

++ 

++ 

++ 

+ 

+ 

+ 

+ 

+ 

0 
9 

8 

7 

67 

 
 
 
 
 
11.2 Loss of EU-based risk-management tools 

Ensuring  continued  usage  of  foreign  exchange  spot  rates  is  crucial  to  determine  the 
payoff under a hedging contract. Authorising the contract instead of the spot rate (that is 
a mere ingredient to the contract) tackles the issue of continued access head on. All the 
options would therefore have the advantage of creating a good level of legal certainty and 
would  dispense  EU  dealer  banks  from  the  necessity  to  verify  whether  any  of  the 
underlying spot rates have been recognised or endorsed for use in the Union.  

On  the  other  hand,  the  contract  authorisation  option  (option  1)  would  entail  an 
administrative  burden  for  supervised  entities,  because  they  would  need  to  seek 
authorization  for  every  new  category  of  hedging  products.  In  addition  it  might  require 
investments on the side of regulators, because they need to take on the additional task of 
authorising contracts and checking, e.g., the robustness of contractual waterfalls in case  

The main drawback of the authorisation option, compared to the other 3, lies in a lack of 
consistency  of  the  current  BMR  approach,  entailing  a  radical  departure  from  the  initial 
philosophy  of  the  BMR  which  was  meant  to  require  authorisation  of  benchmark 
administrators not the individual contracts or products referencing the rate. A deficiency 
of  this  option  is  also  the  lack  of  future-proof  breath.  The  authorisation  option  would 
therefore  risk  creating  an  inconsistent  framework  and  potentially  confusion  on 
compliance matters among different market participants. 

This last concern would also apply to option 2 (contract exemption) as, again, the point 
of attachment for the exemption would be the contract and not the rate that is referenced 
in determining payments due under the hedging contract. The exemption option would, 
nevertheless,  score  higher  than  option  1  in  terms  of  reducing  the  cost  for  market 
participants and regulators, as no individual contract assessments and authorisations are 
necessary.  The  lack  of  contract  authorisations  might,  on  the  other  hand,  make  the 
hedging contracts slightly less robust than with option 1, although the actual value of a 
“per contract” authorisation process remains unproven, especially since the BMR did not 
rely on this tool before.  

Option 3 (rate exemption) would score higher than the previous two options in terms of 
consistency with the original philosophy of the BMR, as the exemption for public policy 
rate is already embedded in the BMR philosophy of exempting policy rates published by 
central  banks.  In  addition,  if  the  exemption  is  formulated  with  the  necessary  degree  of 
flexibility,  it  would  also  be  suitable  to  cater  to  other  policy  rates  that,  for  reasons  of 
monetary  or  other  policy  goals,  are  produced  in  the  relevant  third  countries  under  the 
guidance and control of central banks or other policy makers, such as national treasuries. 
This  would  make  option  3  score  more  in  terms  of  being  future  proof  compared  to  the 
previous two options.  

Option 3 would also tackle one of the design flaws of the BMR, which is to require BMR 
compliance for third country spot exchange rates which are so volatile that an EU-based 
market for forward contracts has developed precisely with the aim of hedging against the 
volatility of the relevant spot rate.  

Table 6 – Comparison of the 3rd country options 

Effectiveness 

Efficien
cy 

Coherence   Total 

Maintain 
transparency 

Maintain risk 
management 

Avoid EU 
banks’ 

Ensure 
EU 

68 

 
 
 
 
 
 
in FX 
derivatives 
trading 

for EU 
exporters and 
foreign direct 
investors  

undue 
exposure to 
currency risk 

banks’ 
competi
tiveness 

Baseline 
Option 1 
contract authorisation  
Option 2 
Contract exemption  
Option 3 
Rate exemption 

0 
+ 

+++ 

+++ 

0 
- 

0 

0 

0 
++ 

+ 

+ 

0 
+ 

++ 

++ 

0 
+ 

+++ 

+++ 

0 
-- 

-- 

0 

0 
2 

7 

9 

Note: Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): +++ strongly 
positive (score 3); ++ very positive (score 2); + positive (score 1); ---strongly negative (score –3); --very negative 
(score –2); – negative (score –1). 

11.3 Preferred option 

11.3.1  Orderly IBOR transition  

In light of the above, the Option 1 is the preferred option. Option 1 gives the regulator a 
high degree of control over the orderly-wind down of a critical benchmark by equipping 
it with broad benchmark conversion powers, aimed at ensuring that there is a temporary 
rate  to  accompany  the  expiry  of  tough  legacy  contracts  referencing  the  benchmark  in 
cessation.  This  option  combines  the  positive  aspect  of  the  authorisation  option  –  the 
ability to calibrate the duration of an authorisation at sub-legislative level – with the main 
advantage it has over all alternatives – that there is no need to create a statutory fall-back 
whereby  this  legacy  rate  “flows  through”  and  directly  replaces  all  existing  IBOR 
references in tough legacy contracts.  

In  terms  of  regulation  and  supervision,  Option  1  also  scores  high  in  providing  the 
competent regulator with the tools to restrict usage to the legacy portfolio (the “no new 
flow” rule).  

11.3.2  Loss of an EU-based risk management tool  

In light of the described impacts, Option 3 is the preferred option. This approach would 
enable EU supervised entities to continue referencing third country foreign spot exchange 
rate for non-convertible  currencies on EU based  forward contracts.  At the same time it 
would maintain consistency within the Benchmark Regulation and not require regulators 
to authorise individual forward contracts.  

12  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

12.1 Orderly IBOR transition  

Table 7 – Monitoring and evaluation – orderly IBOR transition 

Objectives 

Monitoring by EU institutions  

Monitoring by competent authorities  

Competitiveness 
(Safeguard  
competitive 
position 
of 
European  banks  by 
ensuring  continued 
to  manage 
ability 
assets vs liabilities) 

IBOR 

FISMA  services  remain  in  regular  contact  with 
EU banks represented in the EURO RFR in order 
to  assess  whether  the  cost  of  consent  solicitation 
or  other 
transition  cost  have  been 
minimised  in  the  intended  manner  by  avoiding 
renegotiation  of  legacy  stock.  Banks  will  submit 
regular  updates  concerning  the  evolution  of  their 
legacy  portfolios  maturing  after  2021  in  all  four 
relevant  asset  classes:  loans, debt  issuances, debt 

All  NCAs  with  supervised  entities  that  are 
affected  by  the  “legacy  contract”  issue  will 
regularly report to the competent authority which 
mandated  the  conversion  as  well  as  to  the 
European  Commission  [and  to  ESMA]  on  the 
evolution of the legacy  stocks in their respective 
jurisdictions. 

69 

 
 
holdings, corporate deposits and derivatives.  

Banks  will  specify  how  much  of  these  portfolios 
standardised 
renegotiated  using 
could  be 
protocols 
could  be 
(ISDA),  how  much 
individually  renegotiated  using  a  rate  different 
from  the  fall-back  rate  and  how  much  of  the 
portfolio is indeed “wound down” using the fall-
back  rate  that  flows  through  into  all  of  their 
existing USD LIBOR contracts.  

On  the  basis  of  such  contacts  and  of  the  report 
received  by  competent  authorities,  the  European 
Commission  will  report  to  the  co-legislators  in 
2025  on  how  many  contracts  are  still  pending  at 
that  stage  and  whether  the  legacy  rate  should  be 
maintained  for  LIBOR  contracts  maturing  until 
2028.    The  European  Commission’s  report  will 
contain  recommendations  on  the  future  of  the 
legacy  rate  and  will  be  transmitted  to  Council, 
Parliament and ESMA. 

FISMA  services  remain  in  regular  contact  with 
EU banks represented in the EURO RFR in order 
to  assess  whether 
legacy  rates  ensures 
coverage  of  all  legacy  contracts  in  the  intended 
manner  (no  renegotiation  of  individual  contracts 
necessary,  as 
is 
appropriate).   

long  as 

legacy 

rate 

the 

the 

Robustness  of  the 
legacy rate. 

FISMA services will regularly review, by regular 
contact  with  EU  banks  represented  in  the  EURO 
RFR,  whether 
is 
the  mandated 
sufficient  for  use  by  contractual  parties  and 
whether the rate is appropriate (shown by parties 
still  having  to  incur  the  expense  in  renegotiating 
their contracts to insert a more appropriate rate). 

legacy  rate 

On  the  basis  of  such  contacts  and  of  the  report 
received  by  competent  authorities,  the  European 
Commission  will  report  to  the  co-legislators  in 
2025 on the robustness of the legacy rate. 

Timeliness  (toolkit 
has  to  be  fit  for 
purpose  so  that  the 
regulator  is  able  to 
mandate  the  legacy 
rate 
time 
in  due 
before  cessation  of 
the 
IBOR 
publication). 

FISMA  services  remain  in  regular  contact  with 
EU banks represented in the EURO RFR in order 
to  assess  whether 
the  relevant  NCAs  have 
exercised their powers to mandate an appropriate 
legacy rate. 

On  the  basis  of  such  contacts  and  of  the  report 
received  by  competent  authorities,  the  European 
Commission  will  report  to  the  co-legislators  in 
2025  on  the  timeliness  of  the  tool  kit  for 
competent authorities. 

70 

legacy  rate, 

their  periodic 

All competent authorities for critical benchmarks 
will regularly report on a confidential basis to the 
European  Commission  and  to  ESMA  on  the 
result  of 
representativeness 
assessment  on  the  critical  benchmarks  they  are 
responsible for.  
After  having  mandated  the  conversion  of  a 
critical  benchmark 
the 
into  a 
competent  authority  will  be  required  to  report  to 
the European Commission [and to ESMA] on the 
supervisory measures adopted in connection with 
the  mandatory  conversion  as  well  as  on  the 
actions  taken  by  the  administrator  that  has  been 
requested with the publication of the legacy rate. 
All  NCAs  with  supervised  entities  that  are 
affected  by  the  “legacy  contract”  issue  will 
monitor  whether  the  mandatory  conversion  has 
resulted in minimising or even avoiding litigation 
between  counterparts  in  legacy  contracts  and 
report  periodically  to  the  European  Commission 
[and to ESMA].  
Where  litigation  have  been  triggered  against 
supervisory  measures  in  connection  with  the 
to 
mandatory  conversion,  NCAs  will  have 
annually report to the European Commission [and 
to  ESMA]  on  the  development  of  the  litigation 
cases.  
All competent authorities that have exercised the 
power to mandate a conversion of an IBOR into a 
legacy  rate  will  regularly  report  to  the  European 
Commission [and to ESMA] on the actions taken 
by the entity that publishes the mandated rate, as 
well  as  on  the  duration  of  the  mandate  and,  if 
applicable,  on  whether  the  mandate  has  been 
extended to last for more than the initial period.  

 
 
 
12.2 

Loss of an EU-based risk management tool 

Table 8 – Monitoring and evaluation – loss of an EU-based risk management tool 

Objectives 

Monitoring by EU institutions  

Monitoring by competent authorities  

1.  Maintain  trading 
transparency: Ensure 
that EU hedging tools 
on 
remain 
exchanges 
and 
therefore  remain  pre- 
and 
post-trade 
transparent 

listed 

EU 

2. 
Competitiveness: 
Ensure  third  country 
policy  rates  needed 
for  hedging  purposes 
for  EU  counterpart, 
for  which  no  BMR 
compliant  alternative 
exists, can be used by 
EU benchmark users 

FISMA services remain in regular contact with 
all  trading  venues  to  assess  that  the  range  and 
diversity  of  currency  forwards  available  in  the 
EU is maintained. 

All  NCAs  that  supervise  trading  venues  for 
foreign exchange derivatives will regularly report 
to  the  European  Commission  [and  to ESMA] on 
the range and scope of instruments available and 
signal any lacuna that might arise. 

by 

competent 

On the basis of such contacts and of the report 
received 
the 
European  Commission  will  report  to  the  co-
legislators  in  2025  on  how  the  changes  to  the 
BMR have ensured trading in currency forward 
contracts is maintained on transparent markets 

authorities, 

FISMA services remain in regular contact with 
EU corporates to assess whether the exemption 
of public policy exemption has enabled them to 
properly  hedge  their  business  activities  against 
conversion  and  volatility  of  foreign  currencies 
that are not freely convertible.    

All  NCAs  with  supervised  entities  that  use  third 
country  public  policy  rates  will  regularly  report 
on  the  evolution  of  third  country  rates  and 
whether the exemption is adequate to ensure EU 
corporates  do  not  suffer  competitive  advantages 
with their third country counterparties. 

by 

competent 

authorities, 

On the basis of such contacts and of the report 
received 
the 
European  Commission  will  report  to  the  co-
legislators  in  2025  on  whether  the  changes  to 
the  BMR  have  ensured  the  competitiveness  of 
the  proper 
the  EU  banking  sector  and 
development of business in third countries.  

for 

3.  Avoid  EU  banks’ 
undue  exposure  to 
risk: 
currency 
Provide 
a 
regulatory  toolkit  that 
ensure 
third 
that 
country  policy  rates  
do  not  compete  with 
BMR 
compliant 
alternatives  on  unfair 
terms 

supervised 

FISMA services remain in regular contact with 
EU 
and  benchmark 
entities 
administrators  in  order  to  assess  whether  the 
EU  has  been  able  to  maintain  deep  liquidity 
pools  for  forward  contracts  hedging  currency 
risk associated with non-convertible currencies.  

On  this  basis,  FISMA  services  will  regularly 
review  whether  the  contours  of  the  proposed 
exemption  (foreign  exchange  rates  for  non-
convertible currencies) remains appropriate.  

All  NCAs  with  supervised  entities  that  use  third 
country public policy rates will regularly report to 
[and  where 
the  European  Commission 
appropriate to the SSM] on the use made by those 
entities of the exempt rates for hedging purposes 
and  on  the  impact  of  the  changes  of  the  balance 
sheets of supervised entities in terms of exposure 
to third country currency fluctuation.  

by 

competent 

On the basis of such contacts and of the report 
received 
the 
European  Commission  will  report  to  the  co-
legislators in 2025 on the use made in EU based 
forward contracts of the exempt rates.  

authorities, 

71 

 
 
 
 
ANNEX 1: PROCEDURAL INFORMATION 

1.1 

Lead DG, Decide Planning/CWP references 

Lead Directorate-General: Directorate-General for Financial Stability, Financial Services and 
Capital Markets Union (FISMA).  

The initiative is included in the Commission Work Programme 2020 as agenda planning item 
PLAN/2020/7130. 

1.2  Organisation and timing 

Organisation and timing of Inter Service Steering Group’s meetings: two meetings on 2 March 
and 27 March. The Inter Service Steering Group included representatives of the Economic and 
Financial Affairs (ECFIN), Competition (COMP), Internal Market, Industry, Entrepreneurship 
and SMEs (GROW), Justice and Consumers (JUST), Trade (TRADE), the Legal Service (LS) 
and the Secretariat General (SG).  

1.3 

Consultation of the RSB 

The Regulatory Scrutiny Board (RSB) has delivered its opinion on a draft of the Impact 
Assessment on 15 May 2020. 

1st  RBS  Opinion  (copy  of  the  RSB  comments 
from the opinion) 
(1)  The  report  should  concisely  present  a  more 
complete context of the initiatives. On LIBOR, this 
includes  current  best  estimates  of  the  size  and 
composition  of  tough  legacy  assets,  and  relevant 
parallel  measures  to  manage  the  transition  that  are 
in  place  or  anticipated.  The  report  should  account 
for regulators’ views, in particular those of ESMA. 
On  spot  foreign  exchange  rates,  the  report  should 
explain  the  reasons  why  the  original  Benchmark 
Regulation  prohibited  certain  rates,  and  why  this 
rationale 
other 
considerations.  If  a  permanent  exemption  was  not 
considered  when  the  Regulation  was  originally 
proposed, the report should explain why. 

outweighed 

now 

by 

is 

(2)  The  problem  definition  could  be  further 
developed,  in  order  for  instance  to  distinguish 
between 
rate 
(determined  by  the  relevant  entities),  and  the 
rate  a  mandatory 
this 
possibility 
replacement rate in the EU. 

the  availability  of  a 

to  make 

legacy 

(3)  The  report  should  be  transparent  about  what  is 
known  and  what  is  not  known.  It  should  explain 
is  not  possible  or  not 
why  quantification 

How and where comments have been addressed 

The  entire  Section  3.1.1  has  been  reworked  to 
contain  more  granular  estimates  on  how 
the 
expected  USD  LIBOR  cessation  at  the  end  of 
December 2021 would affect the European banking 
and  corporate  borrowing 
sectors.  Additional 
information on the number of USD IBOR contracts, 
their  notional  values  and  expected  maturity  ranges 
has  been  obtained  from  major  European  banks  and 
their  clients.  The  data  differentiates  between  five 
asset  classes  in  which  USD  LIBOR  references  are 
prevalent: corporate loans and advances, debt issued 
by banks, debt held by banks as an asset, corporate 
term  deposits  and  derivatives.    For  each  of  these 
asset  classes,  estimates  on  contract  volumes, 
notional exposures and expected maturity ranges are 
provided (confidential Annex 5).  
Section  10.1.2,  when  describing  the  impact  of  the 
new powers on competent authorities, reports details 
and references the views on a legacy rate expressed 
by  both  ESMA  and  UK  FCA.  Those  opinions  are 
also highlighted in Annex 2. 
The  problem  definition  has  been  reworked  to  more 
clearly  distinguish  between:  (1)  problems  linked  to 
uncertainties around the availability of a legacy rate 
and  (3)  problems  pertaining 
to  difficulty  of 
integrating  such  a  legacy  rate  (once  it  exists)  into 
hundreds of thousands of contracts that are expected 
to  reach  maturity  only  after  the  end  of  LIBOR  by 
2021.  
The additional contract, exposure, maturity and cost 
data  provided  in  Section  3.1.1  (confidential  Annex 
5)  and  in  the  baseline  section,  is  prefaced  with  the 

72 

 
 
proportionate in some areas. It should better include 
the  known  and  relevant  information  in  relation  to 
the size of the problem, its evolution over time, the 
steps 
to  prevent  use  of 
discontinued  IBORs  in  new  contracts,  and  any 
issues  that  will  remain  outstanding  after  a  newly 
calculated LIBOR replacement rate. 

taken  and  planned 

(4)  The  report  should  simplify  and  clarify  the 
baselines it uses for the two topics it analyses. 

should  be 
(5)  The  description  of  options 
comprehensive  and  coherent.  The  report  should 
clarify to  what extent options provide solutions  for 
any  future  possible  benchmark  discontinuation.  It 
should  provide  more  details  about  the  role  of 
regulators in mandating the use of a legacy-rate for 
LIBOR in the EU and the possible impact of Brexit. 
The report should also clarify the extent to which a 
mandated  legacy  rate  would  apply  to  all  contracts 
concluded  with  EU  counterparties, 
including 
contracts under UK law. 
(6)  The  report  should  explain  to  what  extent  the 
options  are  viable  and  reasonably  futureproof 
solutions  beyond  the  near  term,  or  if  additional 
amendments to this Regulation are likely. 

(7)  The  report  should  analyse  impacts  in  a  more 
comprehensive  way.  It  should  discuss  all  relevant 
costs resulting from the options and wider impacts, 
including  impacts  on  SMEs  and  possible  social 
impacts.  The  report  should  clarify  how  it  defines 
and analyses the efficiency of options. 

(8) For foreign exchange, the report should analyse 
impacts  of 
the  preferred  option  on  financial 
stability.  This  includes  risk  considerations  in  terms 
of  the  derivatives  exposure  of  EU  banks  to  certain 
foreign  exchange  risk  that  proposed  exemptions 
to 
from 

the  Regulation  would  permit 

them 

lost 

risk”  and 

institutions  are  able 

necessary  caveat  that,  apart  from  the  tier  one 
banking  institutions  consulted  by  DG  FISMA  staff, 
work  on  identifying  LIBOR  exposures  is  still  in  its 
incipiency.  The  report  clearly  states  that  exposures 
residing with mid-trier institutions and non-financial 
companies  cannot  be  assessed  at  this  juncture  and 
that  the  overall  LIBOR  exposures  and  maturity 
ranges  identified  in  the  report  could  be  subject  to 
considerable  revisions  as  more  financial  and  non-
financial 
to  establish  an 
inventory of their LIBOR exposures.  
The  presentation  of  all  options  (Section  7)  now 
contains  a  detailed  chapter  on  how  reference  to  a 
legacy rate is ring-fenced to contracts pending at the 
time of conversion/cessation of the IBOR rate.  
Sections 6.1 and 6.2 have been reworked to provide 
a single simplified baseline for the respective topics. 
The  baseline  (and  confidential  Annex  5)  now 
contains  quantitative  estimates  of  what  a  ‘do 
nothing’  scenario  might  entail  in  terms  of  cost  for 
both banks and small cap lenders (LIBOR), but also 
“values  at 
risk  management 
opportunities  if  nothing  was  done  to  safeguard 
access to foreign exchange spot rates.  
All policy options are now described according to a 
uniform  grid  comprising  the  following  features  (1) 
how  the  IBOR  conversion/cessation  process  would 
be  structured;  (2)  if,  and  in  the  affirmative,  how  a 
legacy rate is designated; (3) how the option aims to 
ensure  that  the  legacy  rate  works  across  several 
jurisdictions  and  (4)  how  the  option  aims  to  avoid 
that the legacy rate is used beyond its intended aim.   
The  description  of  the  options  now  also  contains  a 
description  on  how  the  options  would  perform  in  a 
Brexit scenario. 
The presentation of the option is improved to show 
their 
in  a 
comprehensive  manner.  The  presentation  of  the 
options  aims  to  be  clearer  on  the  extent  to  which 
they  aim  to  address  the  legacy  contract  issue  and 
also on the areas which they do not aim to address. 
There  is  a  detailed  analysis  (in  Section  9)  on  why 
the  preferred  option  addresses  the  issue  of  IBOR 
transition in a more comprehensive manner than the 
other  options  and  explains  why  the  chosen  option 
scores best in terms of being “future-proof” beyond 
the near term.   
In order to facilitate an analysis of the efficiency of 
the options, the specific objectives against which the 
efficiency  of  the  options  is  assessed  have  been 
clarified  (Section  5).  Both  the  options  (Section  7) 
and their anticipated impacts  (Section 9) have been 
entirely  reworked  to  show  more  precisely  on  how 
efficiently the  options  would  work in achieving the 
specific policy objectives.  
Section  2.2  on  the  operation  of  foreign  exchange 
markets and their participants now contains chapters 
on the operation of forward contract markets and on 
the risk management tools that EU banks are obliged 
to employ in order to ensure that their balance sheet 
is  not  affected  by  currency  exposures  and,  in 

strengths  and 

respective 

limits 

73 

 
 
accumulate,  and  ability  of  regulators  to  monitor 
those risks. 

(9)  The  report  needs  careful  editing  to  make  it 
clearer,  more  concise  and  more  reader-friendly  for 
non-experts.  The  presentation  of  impacts  relies  too 
heavily 
presentation.  The 
tabular 
accompanying text should guide the reader through 
the information that is in the tables and discuss the 
main conclusions. 

on 

a 

particular,  a  decline  in  third  country  currency 
exchange  rate.  Section  2.2  also  sets  out 
the 
applicable  risk  management  requirements  in  EU 
laws  and  the  regulatory  monitoring  tools  for  risk 
exposures. This Section also sets out why access to 
deep liquidity pools for hedging instruments is itself 
necessary  for  banks  to  hedge  their  own  currency 
exposures  and  why  a  reduction  in  access  to  the 
relevant spot exchange rates diminishes banks’ own 
risk management.  
The  impact  session  (9.3)  now  describes  how  the 
different options would impact the foreign exchange 
risk management opportunities of EU banks.  
The  tabular  presentation  of  impacts  in  Sections  9 
and 10 has been replaced by text which is structured 
to guide the non-expert through the pros and cons of 
the policy options assessed.  

1.4 

Evidence, sources and quality 

This  impact  assessment  draws  on  an  extensive  amount  of  targeted  consultations, 
interviews,  workshops  and  participation  in  international  fora  that  are  tasked  with  the 
reform of benchmarks, such as the Financial Stability Board (FSB). Regular work on the 
reform  of  critical  benchmarks  has  been  taking  place  for  several  years,  but  has  notably 
accelerated with the latest progress report on benchmark reform presented by the FSB in 
January  2020.  There  have  been  considerable  efforts  to  use  authoritative  sources 
(European Central Bank, Bank for International Settlements, other central banks, national 
regulators, or ESMA). 

With respect to the critical importance of interest rate benchmarks, notably USD LIBOR, 
considerable amounts of evidence has been  gathered from  the European banking  sector 
(individual bank treasury departments, not only trade associations) and ICE Benchmark 
Administration.  All  conversations  took  place  at  the  level  of  top  management  in  the 
treasury  departments  and  directly  with  the  executive  level  at  ICE  Benchmark 
Administration.  As  this  evidence  was  gathered  in  detailed  (often  on-site)  conversations 
with  corporate  treasurers,  the  relevant  benchmark  administrators  and  international 
regulators in the FSB, the quality of the evidence can be considered as very granular and 
of the highest possible quality.  

In  particular  information  on  the  balance  sheet  of  European  banks  has  been  obtained  in 
detailed conversations with the heads of major European banks’ treasury departments. 

Equally, the situation on third country currency rates has been under review for at least 
two  years and has been  explored in  several  on-site interviews with  the banks that offer 
foreign exchange hedging tools. Work to find practical solutions to this obvious “design 
flaw”  in  the  Benchmark  Regulation  has  resulted  in  interviews  not  only  with  the  dealer 
banks that offer the EU  based hedging contracts, but  also  with  the operators of trading 
platforms  where  these  hedging  contracts  are  traded  (both  interdealer  platforms  and 
dealer-to-customer platforms were interviewed since at least 2018). Member States have 
also been involved in this work via different session of the Expert Group of the European 
Securities Committee (EGESC) 

74 

 
 
 
Below  is  a  list  of  official  and  other  key  materials  for  the  year  202048  that  has  been 
produced  by  the  various  working  streams.  The  list  is  organised  by  several  jurisdictions 
(EU and euro area, UK, US, and global). 

EU and euro area: 

  April  2020:  ESMA  issued  a  Public  Statement  regarding  the  timeliness  of 
fulfilling  external  audit  requirements  for  interest  rate  benchmark  administrators 
and contributors to interest rate benchmarks. Due to the difficulties arising from 
the  COVID-19  pandemic,  ESMA  expects  NCAs  not  to  prioritise  supervisory 
actions  against  administrators  and  supervised  contributors  relating  to  the 
timeliness of fulfilling audit requirements where the audits are carried out by 30 
September 2020. 

  March  2020:  The  European  Commission  published  a  roadmap  of  the  BMR 

review49. 

  March 2020: The working group on euro risk-free rates published its March 2020 

newsletter. 

  March  2020:  The  working  group  on  euro  risk-free  rates  updated 

its 

communications toolkit, including the slides on EURIBOR fall-backs. 

  March 2020: The working group on euro risk-free rates published a consultation 
giving  interested  parties  the  opportunity  to  provide  feedback  as  to  whether  the 
working  group should issue recommendations  regarding the voluntary  exchange 
(or  lack  thereof)  of  cash  compensation  between  bilateral  counterparties  to 
swaption contracts impacted by the CCP discounting switch from EONIA to the 
€STR.  The  working  group  expects  that  the  feedback  on  this  consultation 
document  will  provide  valuable 
to  evaluate  whether 
input 
recommendations  from  the  working  group  would  be  of  assistance  to  the market 
and, if so, what the recommended approach should be. The deadline for responses 
is 3 April 2020. The European Commission and the European Central Bank will 
evaluate  all  responses  and  prepare  an  anonymised  summary  of  their  feedback. 
This  summary  will  be  published  on  the  ECB’s  website  and  considered  by  the 
working group at its meeting on 21 April 2020. 

in  order 

  March  2020:  ESMA  launched  a  consultation  on  draft  RTS  under  the  EU 
Benchmarks  Regulation  covering  various  aspects  relevant 
to  benchmark 
administrators (e.g. governance, benchmark methodology, systems and controls). 
There  is  also  a  section  on  mandatory  administration  of  a  critical  benchmark, 
which proposes the minimum criteria that NCAs should take into account  when 
assessing  the  cessation  of  a  critical  benchmark  or  the  transition  of  a  critical 
benchmark to a new administrator pursuant to Article 21(1)(b) of the BMR. The 
deadline for responses is 9 May 2020. 

  February 2020: The working group on euro risk-free reference rates published a 
report  on  the  transfer  of  EONIA’s  cash  and  derivatives  markets  liquidity  to  the 
€STR  on  the  working  group  main  website  and  on  the  key  milestones  webpage, 
together with a press release. 

  February 2020: ESMA announced that it responded to the European Commission 
consultation on the EU Benchmarks Regulation review. On critical benchmarks, 

48 https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/benchmark-reform/benchmark-
reform-and-transition-to-risk-free-rates-archive/ (for year 2017 to 2019 please refer to the website) 
49 
Benchmark-Regulation 

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12268-Review-of-the-

75 

 
 
                                                           
ESMA  proposes  that:  (i)  competent  authorities  are  able  to  request  an 
administrator  to  change  its  methodology;  (ii)  the  process  of  suspension  or 
withdrawal  of  authorisation  or  registration  of  an  administrator  is  clarified;  and 
(iii)  the  assessment  by  competent  authorities  of  the  cessation  procedures  of  the 
administrator  is  clarified.  In  relation  to  third  country  benchmarks,  ESMA 
proposes to take into account different alternative approaches when defining the 
scope  of  the  BMR;  and,  to  increase  transparency  to  the  benefit  of  benchmark 
users,  ESMA  proposes  to  include  the  list  of  both  EU  and  third-country 
benchmarks  in  its  register  together  with  an  appropriate  identification  of 
benchmarks50. 

UK: 

  April 2020: the FCA submitted supportive feedback of the European Commission 

roadmap of the BMR review (Inception Impact Assessment)51. 

  March 2020: UK HMRC has published a draft guidance paper explaining its view 
on the tax implications of changes to financial instruments driven by benchmark 
reform. Among other things, there is a statement that “Where the parties agree to 
change  the  terms  of  the  instrument  for  the  purposes  of  responding  to  the 
withdrawal  of  LIBOR,  HMRC  would  normally  view  this  as  a  variation  of  the 
existing  instrument.  The  amended  contract  should  be  regarded  as  the  same 
contract and entered into at the same time as the original one. This would apply, 
for  example,  where  the  parties  agree  to  replace  LIBOR  for  one  of  the  new 
reference rates or with a fixed interest rate. It does not matter if the spread on the 
instrument  needs  to  be  amended  slightly,  or  if  additional  payments  are  made 
between the parties, provided the economics of the transaction remain mostly the 
same. Comments on the draft guidance are requested by 28 May 2020. 

  March 2020: The FCA, Bank of England and Working Group on Sterling Risk-
Free  Reference  Rates  issued  a  statement  on  the  impact  of  COVID-19  on  firm’s 
LIBOR transition plans. The central assumption that firms cannot rely on LIBOR 
being  published  after  the  end  of  2021  has  not  changed  and  end-2021  should 
remain the target date for all firms to meet. The full statement is available on the 
Working  Group  on  Sterling  Risk-Free  Reference  Rates'  website  and  the  FCA 
website. 

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12268-Review-of-the-

50 https://www.esma.europa.eu/press-news/esma-news/esma-responds-european-commission-consultation-
benchmark-regulation-review 
51 
Benchmark-Regulation/F512186   
“We  think  these  changes  proposed  by  the  European  Commission  are  important  ideas  in  addressing  the 
challenges  of  enabling  smooth  transition  away  from  critical  benchmarks  that  cannot  be  sustained 
indefinitely, including where their representativeness cannot or will not be restored due to the underlying 
markets  they  seek  to  represent  changing  in  fundamental  ways.  These  could  be  of  great  value  to  other 
authorities if they in future face the sort of challenges the FCA has had to consider in respect of the end of 
LIBOR.  We  think  that  the  chances  of  being  able  to  achieve  smooth  transition  can  be  maximised  if 
competent authorities are empowered with tools to minimise the potential disruption, including tools that 
could protect those ‘trapped’ on outstanding contracts referencing the critical benchmark (for example, by 
enabling  the  use  of  an  alternative  formula  for  the  retiring  benchmark’s  calculation  that  protects  the 
economic position of contractual parties while the critical benchmark is retired), whilst in similar spirit to 
some  original  provisions  in  the  Benchmark  Regulation,  new  use  of  benchmarks  that  no  longer  meet  the 
representativeness  or  other  requirements  of  the  Regulation  would  be  restricted.  Given  that  critical 
benchmarks such as LIBOR are often used on a cross-border basis, the FCA will continue to co-ordinate 
with  EU  and  other  overseas  authorities  on  these  matters,  including  through  the  FSB’s  Official  Sector 
Steering Group work on these issues. 

76 

 
 
                                                           
  March  2020:  The  Working  Group  on  Sterling  Risk-Free  Reference  Rates 
published a summary of responses to its consultation on credit adjustment spread 
methodologies  for  fall-backs  in  cash  products  referencing  GBP  LIBOR.  The 
consultation  identified  a  strong  consensus  in  favour  of  the  historical  5  year 
median  approach,  in  line  with  the  approach  adopted  by  ISDA,  as  the  preferred 
methodology  for  credit  adjustment  spreads  across  both  cessation  and  pre-
cessation fall-backs for cash products maturing beyond end-2021. 

  March  2020:  The  FCA  released  a  statement  on  how  it  would  announce  LIBOR 

contractual triggers. 

  March 2020: The UK Budget 2020 included a statement that the UK government 
will  consult  to  ensure  that  where  tax  legislation  makes  reference  to  LIBOR  it 
continues to operate effectively. The consultation will also enable the government 
to ensure it is aware of all of the significant tax issues that arise from the reform 
of LIBOR and other benchmark rates. 

  March 2020: The Working Group on Sterling Risk-Free Reference Rates issued a 
statement welcoming the Bank of England’s discussion paper on the publication 
of a SONIA compounded index to further support the widespread use of SONIA 
compounded  in  arrears.  The  statement  outlines  how  bond  markets  can  use  the 
proposed SONIA index and its relevance for issuers’ choice of conventions. 
  March  2020:  The  Working  Group  on  Sterling  Risk  Free  Reference  Rates 

published its monthly newsletter for February 2020. 

  February  2020:  The  FCA  sent  a  “Dear  CEO”  letter  to  all  UK  regulated  asset 
management firms setting out their expectations for firms as they prepare for the 
end of LIBOR. 

  February 2020: The Bank of England announced that it intends to publish a daily 
SONIA  Compounded  Index,  which  is  a  number  representing  the  returns  from  a 
rolling investment earning interest each day at the SONIA rate. The change in this 
index between any two dates could be used to calculate the interest rate payable 
on a SONIA product over that period. This is consistent with the approach taken 
by the Federal Reserve Bank of New York and the publication of its SOFR Index. 
Publication of the SONIA Compounded Index is anticipated to commence by end 
July 2020. In addition to the SONIA Compounded Index, the Bank of England is 
considering whether – and, if so, how – to publish daily a simple set of SONIA 
Period  Averages.  These  could  directly  provide  the  interest  rate  payable  over 
specific periods of time (i.e. the compounded rate over the last X days or months). 
The Bank invited comments on the options presented in the discussion paper by 9 
April 2020, after which it will decide whether it would be helpful to publish such 
averages. 

  February 2020: The Bank of England announced that from October 2020 it will 
begin increasing haircuts on LIBOR-linked collateral it lends against.  From 2020 
Q3,  the  Bank  will  make  newly-issued  LIBOR  collateral  ineligible  and 
progressively increase the haircuts on existing LIBOR-linked collateral over time. 
Haircuts are scheduled to reach 100% (i.e. implying effective ineligibility) at the 
end of 2021. 

  January  2020:  The  Working  Group  on  Sterling  Risk-Free  Reference  Rates,  the 
Bank of England and FCA published a set of documents, outlining priorities and 
milestones for 2020 on LIBOR transition and emphasizing the need for firms to 
accelerate efforts to ensure they are prepared for LIBOR cessation by end-2021. 
A press release entitled “Next steps for LIBOR transition in 2020: the time to 
act is now” is also available. The package includes: 

77 

 
 
The Working Group's priorities and roadmap for 2020. 

o  The use cases of benchmark rates: compounded in arrears, term rate and 
further alternatives: This paper sets out the Working Group’s views on the 
appropriate  use  of  SONIA  compounded  in  arrears  for  businesses  and 
clients, and guidance for where the use of alternative approaches, such as 
a Term SONIA Reference Rate, may be necessary. In relation to the bond 
market, it notes that overnight SONIA compounded in arrears has become 
the  market  norm  for  floating  rate  sterling  bonds  and  there  is  strong 
liquidity  developing  for  securitisations  that  reference  overnight  SONIA 
compounding in arrears. 

o  Progress on the transition of LIBOR-referencing legacy bonds to SONIA 
by way of consent  solicitation:  This paper highlights  the progress  on the 
transition  of  LIBOR-referencing  legacy  bonds  to  SONIA  by  way  of 
consent solicitation and sets out six considerations “lessons learned” from 
recent conversions of legacy LIBOR bonds to SONIA.   

o  Factsheet - Calling time on LIBOR: Why you need to act now: This is a 
high-level  (1-page)  factsheet  with  sections  “What’s  happening?”,  “What 
do I need to do?” and “Where can I find more information?” 

o  The  Working  Group’s  consultation  (published  in  December)  on  credit 
adjustment spread methodologies for cash products, seeking feedback by 
6 February 2020, is highlighted again on the Working Group’s webpage. 
The paper considers four methodologies that could be used to calculate the 
credit  adjustment  spread  for  fall-back 
in  sterling  cash 
instruments. 

language 

o  FCA and Bank of England statement regarding a switch from  LIBOR to 
SONIA  for  sterling  interest  rate  swaps:  This  FCA  and  Bank  of  England 
statement encourages market makers to switch the convention for sterling 
swaps from LIBOR to SONIA on 2 March 2020. 

o  PRA  and  FCA  letter  to  Senior  Managers  –  Next  steps  on  LIBOR 
transition: This is a joint letter from the PRA and FCA to major banks and 
insurers setting out initial expectations of firms’ transition progress during 
2020.  It  emphasizes  that  2020  will  be  a  key  year  in  the  transition  away 
from LIBOR and highlights the Working Group’s 2020 targets for 2020. It 
states  that  LIBOR  transition  plans  should  include  the  targets  in  project 
milestones  and  ensure  that  management  information  is  available  to  track 
progress.  As  a  guide,  the  FCA  and  PRA  consider  that  action  in  the 
following areas is key to delivery: (a) product development; (b) reviewing 
infrastructure,  including  updating  loan  system  capabilities;  (c)  client 
communications  and  awareness;  and  (d)  updating  documentation.  The 
FCA  and  the  PRA  will  step  up  engagement  with  firms  on  LIBOR 
transition through their regular supervisory relationship, reviewing firms’ 
management  information  and  collecting  data  from  firms  to  assess 
progress. There is also an appendix detailing progress made in 2019. 

  January  2020:  The  Working  Group  on  Sterling  Risk  Free  Reference  Rates 

published its monthly newsletter for January 2020. 

US: 

  April  2020:  The  ARRC  welcomed  Fannie  Mae  and  Freddie  Mac’s 
their  SOFR-linked 
that  provided  additional  details  about 

announcements 
adjustable-rate mortgage (ARM) products. 

78 

 
 
  April  2020:  The  ARRC  announced  a  recommendation  of  a  spread  adjustment 
methodology  for  cash  products  based  on  a  historical  median  over  a  five-year 
lookback period calculating the difference between USD LIBOR and SOFR. This 
matches  the  methodology  recommended  by  ISDA  for  derivatives  and  would 
make the ARRC’s recommended spread-adjusted version of SOFR comparable to 
USD LIBOR and consistent with ISDA’s fall-backs for derivatives markets. 
  March  2020:  The  ARRC  released  its  February-March  2020  newsletter.  This 
newsletter  summarises  the  most  recent  ARRC,  US  official  sector,  market  and 
international developments and SOFR market liquidity. 

  March 2020: The ARRC released a proposal for New York State legislation. The 
legislation  is  intended  to  minimize  legal  uncertainty  and  adverse  economic 
impacts associated with LIBOR transition. The ARRC will hold a webinar on the 
legislative proposal in the coming weeks. 

  March 2020: The ARRC announced that it is extending the comment period for 
public  feedback  on  its  consultation  about  spread  adjustment  methodologies  for 
cash products referencing USD LIBOR. The consultation was initially released on 
21 January 2020 and the comment period is being extended until 25 March 2020 
to  provide  sufficient  time  to  allow  for  thorough  feedback.  The  consultation 
proposes a static spread adjustment that would be implemented at a specific time 
on  or  before  USD  LIBOR’s  cessation  and  would  make  the  spread-adjusted 
version of the SOFR comparable to USD LIBOR. 

  March 2020: The Federal Reserve Bank of New York began publishing 30-, 90-, 
and  180-day  SOFR  Averages  as  well  as  a  SOFR  Index,  in  order  to  support  a 
successful transition away from USD LIBOR. The Chair of the ARRC welcomed 
this. 

  February  2020:  The  ARRC  has  welcomed  the  US  Federal  Housing  Finance 
Agency’s  announcement  that  Fannie  Mae  and  Freddie  Mac  will  stop  accepting 
adjustable-rate mortgages based on LIBOR by the end of 2020; and plan to begin 
accepting  ARMs  based  on  SOFR  later  in  2020.  Both  Fannie  Mae  and  Freddie 
Mac  also  announced  they  would  adopt  the  ARRC’s  recommended  fall-back 
language. 

  January 2020: The ARRC released its December 2019 - January 2020 newsletter. 
This  newsletter  summarises  the  most  recent  ARRC,  US  official  sector,  market 
and international developments and SOFR market liquidity. 

  January  2020:  The  ARRC 

two 

released 

items  developed  by 

its 
Operations/Infrastructure  Working  Group:  a  vendor  survey  and  a  buy-side 
checklist.  Both  documents  are  intended  to  support  market  participants’  work  to 
address  operational  challenges in  the transition  from  USD  LIBOR  to  SOFR. As 
noted in the accompanying letter, the survey serves as a self-assessment tool for 
software and technology vendors to assess their own readiness, while also serving 
as  a  platform  to  raise  operational  issues  to  the  ARRC.  The  checklist  provides 
steps that buy-side firms can consider when transitioning from LIBOR. 

  January  2020:  The  ARRC  released  a  consultation  on  spread  adjustment 
methodologies  for  cash  products  referencing  USD  LIBOR.  These  spread 
adjustments are intended for use in USD LIBOR contracts that have incorporated 
the  ARRC’s  recommended  hardwired  fall-back  language,  or  for  legacy  USD 
LIBOR contracts where a spread-adjusted SOFR can be selected as a fall-back. 

Global: 

79 

 
 
  March 2020: ISDA announced that it would re-consult following (i) the release of 
new information by the FCA and the IBA on the length of time LIBOR may be 
published  following  a  regulatory  statement  that  the  benchmark  is  no  longer 
representative of the underlying market; and (ii) the launch of a consultation by 
LCH on proposed rule book changes to implement pre-cessation fall-backs. The 
statements  and  this  new consultation  follow  a  2019  ISDA  consultation  that  was 
unable to find market consensus on how to implement pre-cessation fall-backs in 
derivatives  contracts.  The  new  consultation  asks  whether  the  2006  ISDA 
Definitions  should  be  amended  to  include  fall-backs  that  would  apply  to  all 
covered  derivatives  following  the  permanent  cessation  of  an  IBOR  or  a  ‘non-
representative’ pre-cessation event, whichever occurs first. Under this scenario, a 
single protocol would also be launched to allow participants to include both pre-
cessation  and  permanent  cessation  fall-backs  within  their  legacy  derivatives 
trades. 

  March  2020:  ISDA  published  a  report  summarising  the  final  results  of  its 
supplemental consultation on the spread and term adjustments that would apply to 
fall-backs  for  derivatives  referencing  euro  LIBOR  and  EURIBOR.  The  report 
confirms  the  findings  published  by  ISDA  at  the  end  of  February  2020  that  the 
overwhelming majority  of respondents  agreed with an implementation  based on 
the  ‘compounded  setting  in  arrears  rate  approach  with  a  backward-shift 
adjustment’  and  a  spread  adjustment  based  on  a  ‘historical  median  over  a  five-
year lookback period’ for fall-backs in derivatives referencing EUR LIBOR and 
EURIBOR  and  other  less  widely  used  IBORs,  consistent  with  the  preferred 
approach for other IBOR fall-backs. 

  February 2020: The Basel Committee on Banking Supervision (BCBS) published 
a  newsletter  on  benchmark  rate  reforms.  Among  other  things,  it  confirms  that, 
under  the  Basel  Framework,  amendments  to  capital  instruments  pursued  solely 
for the purpose of implementing benchmark rate reforms will not result in them 
being  treated  as  new  instruments  for  the  purpose  of  assessing  the  minimum 
maturity  and  call  date  requirements  or  affect  their  eligibility  for  transitional 
arrangements of Basel III. 

  February  2020:  ISDA  has  published  a  table  identifying  its  key  workstreams 

relating to IBOR reform and the development of RFRs. 

  January 2020:  IBA launched a consultation on the introduction of an ICE Swap 
Rate based on SONIA. (ICE Swap Rate represents the mid-price for interest rate 
swaps (the fixed leg), at particular times of the day, in EUR, GBP and USD and 
in  tenors  ranging  from  1  year  to  30  years.  ICE  Swap  Rate  is  used  for  various 
purposes, including in some bonds.) The consultation focuses on the introduction 
of a new suite of ICE Swap Rate tenors which will have SONIA as the floating 
leg. Comments are invited by 20 March 2020. 

regarding  pre-cessation 

  January 2020: Developments in relation to pre-cessation triggers for derivatives: 
The FCA responded to ISDA following ISDA’s letter of December 2019 which, 
in turn, was a response to a letter from the Co-Chairs of the FSB’s Official Sector 
Steering  Group 
in  derivative  contracts 
referencing  key  IBORs.  The  FCA  letter  sets  out  the  reasons  why  “market 
participants  should  not  assume  that  any  period  of  non-representative  LIBOR 
based on reduced panel bank submissions would last for more than a short period 
(i.e.,  a  period  of  months,  not  years).”  ISDA  has  also  received  a  response  to  its 
letter from ICE Benchmark Administration. In addition, London Clearing House 
announced on 27 January that it is commencing a rulebook consultation process 
regarding the inclusion of an automatic trigger into fall-back arrangements where 

triggers 

80 

 
 
a  relevant  regulatory  authority  determines  an  existing  benchmark  to  be  non-
representative (i.e. a “pre-cessation trigger”). The draft rulebook change proposes 
the  same  approach  that  is  planned  to  be  used  in  respect  of  permanent  cessation 
triggers.  That  is,  to  use  the  adjusted  RFR  as  formulated  in  the  relevant  ISDA 
supplemented  IBOR  definition  together  with  a  credit  spread  adjustment.  The 
consultation period ends on 23 March 2020. 

  January 2020: ISDA published its interest rate benchmarks review, full year 2019 
and Q4 2019, which  analyses trading volumes of interest  rate derivatives (IRD) 
transactions in the US referencing certain RFRs and certain IBORs. 

  January  2020:  The  European  Commission  published  its  endorsement  of  the 
International Accounting Standards Board (IASB) phase 1 IBOR amendments in 
the  EU  Official  Journal.  These  amendments  address  the  financial  reporting 
consequences  of  the  interest  rate  benchmark  reform  in  the  period  before  the 
replacement of an  existing interest  rate benchmark with  an alternative reference 
rate. 

81 

 
 
  
 
 
ANNEX 2: STAKEHOLDER CONSULTATIONS 

The  Commission  has  carried  out  extensive  consultations  with  various  groups  of 
stakeholders  in  order  to  obtain  a  complete  picture  of  the  different  views  market 
participants  may  hold  with  regards  to  the  issues  tackled  in  this  impact  assessment. 
Beyond the workshop and the public consultation presented in more detail in sections 2.1 
and 2.2, the Commission has been actively following the work of the Euro RFR Working 
Group,  composed  of  stakeholders  from  the  private  sector,  including  contributors, 
administrators and users of benchmarks, as well as the ECB which provides Secretariat 
and  ESMA  and  the  Belgian  FSMA  in  observer  status  along  with  the  EC,  in  order  to 
identify  varied  stakeholder  considerations  that  should  be  kept  in  mind  in  designing  the 
best  policy  tools  for  the  orderly  cessation  of  critical  benchmarks.  Furthermore,  the 
Commission  is  a  member  of  the  FSB  OSSG,  which  comprises  senior  officials  from 
central  banks  and  regulatory  authorities,  thus  giving  it  a  good  insight  into  the 
international public policy perspectives on the transition to risk-free rates. In addition the 
Commission  Services  sits  as  an  observer  in  ESMA  Board  of  Supervisors  and  in  its 
technical  standing  groups  among  which  that  on  Benchmark,  from  which  it  has  closely 
followed the work of ESMA in the context of critical benchmarks. Finally, DG FISMA 
staff has had many bilateral  contacts  with  a broad spectrum of stakeholders in  order to 
further refine its analysis and policy approach.  

Below  is  a  detailed  summary  of  the  results  of  the  workshop  organized  by  the 
Commission  and  its  public  consultation  on  the  BMR  review,  in  anonymized  form. 
However,  given  the  importance  of  ESMA’s  views  as  one  of  the  key  public  entity 
stakeholders, its views are rendered in more detail.  

2.1 Workshop 

On 26 November 2019, the Commission organised a workshop around three main topics: 

1.  The first panel discussed whether regulators had the necessary tools at hand in order to 
maintain,  sustain  and  potentially  amend  the  methodologies  underpinning  critical 
benchmarks.  Competent  authority  A  expressed  the  view  that  the  current  toolbox  was 
broadly sufficient, but that some additional powers to force methodological change might 
prove useful in sustaining the IBOR rates. The same regulator also expressed satisfaction 
with the operation of the Euribor college of supervisors and the fact that all regulatory 
decisions that  needed  to  be  taken involving  the  college  were taken  swiftly  and without 
any  frictions  between  the  lead  regulator  and  the  regulators  that  supervised  the  panel 
contributors.  
Competent  authority  B  argued  that  there  would  need  to  be  a  significant  increase  in 
regulatory powers, not only to maintain panel participation and panel stability, but also 
to  actively  increase  participation  rates.  One  proposal  was  that  heavy  users  of  Euribor 
should also be mandated to contribute transactions or quotes to the Euribor administrator. 
That regulator had strong words against “free riding” of banks that issue lots of financial 
products  referencing  Euribor,  without  participating  in  the  panel.  There  was  a  general 
consensus among panellists that regulation of critical benchmarks should be based on the 
“precautionary  principle”  giving  supervisors  the  powers  to  intervene  in  anticipation  of 
representativeness issues arising.  

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A central bank took a slightly divergent view, stating that the main issue is that market 
participants  break  their  dependency  on  Euribor  and  undertake  serious  efforts  to 
familiarise themselves with the new risk free rates as replacement rates. Risk-free rates 
had  more  plausible  usage cases than  was  commonly  assumed.  A fall back  rate is  not  a 
temporary  crutch  while  Euribor  is  reformed  or  made  representative  again,  it  is  a 
permanent  replacement  once  the  Euribor  ceases  (e.g.,  when  the  regulator  concludes 
that it is no longer representing the underlying market reality it is supposed to measure). 
Competent authority C took an intermediate approach, stressing the need to continuously 
reform Euribor while also inserting replacement rates into legacy contracts that will not 
expire before the transitional period ends in 2021. 
The  EC  raised  the  issue  of  contractual  continuity  with  respect  to  contracts  that  will 
need to be adapted to incorporate a fall back rate. Competent authority B took the view 
that  millions  of  consumer  mortgages  could  not  be  renegotiated  individually.  Also,  as 
there is no standard setter like ISDA for derivatives or the London Market Association 
(LMA)  for  corporate  loans,  the  sector  could  not  develop  a  contractual  template  for  all 
mortgage banks. Competent authority B called for the European legislator to designate an 
official replacement rate, so that retail mortgage holders would not be able to complain 
in case the cessation trigger was pulled and the mortgage rate switched from Euribor to 
the replacement rate. Upon questioning, a  member of the audience suggested to follow 
the approach by the French legislator which seems to consist in a law obliging customers 
to  accept  a  replacement  rate  that  most  “closely  resembled”  the  rate  that  it  replaces. 
Apparently this standard (“economic equivalence”) would even allow a panel bank rate 
to be replaced by a rate based on wholesale financing or even a risk-free rate. Competent 
authority C would also be willing to assist in the preparation of contractual processes in 
designating  the  replacement  rate,  even  if  it  was  not  an  official  one  resulting  from 
European legislation.  

2.  The second panel delved into further detail on whether BMR was fit to accompany the 
transition  of  existing  interbank  (IBOR)  rates  to  the  new  risk  free  rates,  also  assessing 
whether  BMR  was  sufficient  to  accompany  the  transition  from  Eonia  to  €STR.  The 
verdict among panellists was that the transition issues were sufficiently covered, less so 
issues  around  legacy  contracts  and  the  insertion  of  substitute  or  fall  back  rates.  The 
representative of the Loan Market Association mentioned that, between corporate loans 
and existing bond portfolios, there were still in excess of 2 trillion euro contracts at risk 
in  the  transition  from  IBOR  to  risk  free  rates.  Difficult  issues  of  whether  the 
replacement  rates  measured  the  same  underlying  markets  as  the  IBORs  were  not 
fully  resolved  and  the  BMR  did  not  give  guidance  on  what  would  be  an  economically 
equivalent rate to an IBOR. The LMA observes a fine line between regulatory powers to 
adapt  methodologies  and  a  mandate  to  actually  change  the  underlying  market  that  a 
benchmark is supposed to reflect. The LMA would also advocate for more legal certainty 
on when a replacement rate could be triggered, the BMR confines itself to requiring that 
such replacement rates should be agreed without stating when they should start to apply. 

3.  The third panel provided for a cross-cutting view on whether the BMR scope as well as 
the  third  country  provisions  should  be  reassessed.  Bank  A  stated  that  the  BMR  should 
adopt  a  designation  approach  whereby  the  legislator  should,  on  the  basis  of  a 
quantitative  (trillions  of  reference  contracts)  and  risk  based  assessment  (propensity  to 
manipulation) decide which indices should be regulated under BMR and which not. The 

83 

 
 
 
 
designation approach was indeed the default choice of all other jurisdiction that followed 
the European lead of regulating benchmarks, such as Japan, South Korea, Australian NZ, 
etc.  the  designation  approach  was  also  the  one  initially  in  the  UK’s  benchmark 
legislation.  It  is  only  the  EU  that  opted  for  an  “all-in”  approach  with  the  subsequent 
necessity  to  exclude  from  the  scope  of  the  BMR  lots  of  indices,  such  as  the  ones 
provided  by  central  banks,  statistical  offices  or  other  comparable  public  sector  bodies. 
This was clearly sub-optimal and resulted in a lot of time and resources being spent on 
authorisations and registrations on not very systemic indices. 
Bank  B  argued  that  a  risk  based  approach  might  reveal  that  a  regulated  data 
benchmarks, such as the CAC 40 or the DAX, should not be regulated under BMR as 
the assembly of public price data according to a pre-established weighting formula (equal 
weighted, price weighted or free-float weighted) would not make the benchmark prone to 
manipulation. On the other hand, a benchmark that assembles quotes or pricing data from 
non-public markets might well be more prone to manipulation and should therefore be in 
scope.  A  data  vendor  argued  that  all  types  of  “strategy  indices”  reflecting  all  kinds  of 
different investment styles should be in scope, even if individual strategy indices did not 
have  large  sums  of  assets  referencing  them.  The  underlying  rationale  for  regulating  an 
index was to address “conflicts of interest” as strategy indices were often designed by 
the  investment  firms  that  also  sold  the  underlying  product.  Bank  C  raised  the  issue  of 
foreign  exchange  indices  which  were  essential  to  determine  the  pay-out  of  non-
deliverable forward contracts, but where BMR compliance was hardly enforceable. Bank 
C took the view that foreign exchange benchmarks that were set as policy rates should be 
excluded from the scope of the Regulation as “public administration” benchmarks. 

2.2.  Feedback  statement  of  the  Inception  Impact  Assessment  relating  to  the 

review of the Benchmark Regulation 

I. 

Introduction 

On  18  March,  DG  FISMA  published  an  inception  impact  assessment  (IIA)  intended  to  inform 
stakeholders  about  the  scope  of  the  review  of  Regulation  (EU)  2016/1011  (Benchmark 
Regulation  /  BMR)  and  outlining  different  policy  options  considered.  The  consultation  period 
closed on 15 April 2020.  

This feedback statement provides a factual summary of the responses received. The Commission 
has received responses from 22 respondents, mostly private companies and business associations. 
Below are some statistics to provide a better understanding of the respondents’ background.  

Breakdown by country of origin 

5
4
3
2
1
0

84 

 
 
 
Type of respondent 

Public authority

Company

Business Association

0

2

4

6

8

10

12

14

In  the  IIA,  the  Commission  has  outlined  two  urgent  issues  that  the  BMR  review  aims  to  deal 
with,  namely  the  helping  to  ensure  the  orderly  transition  from  panel-based  critical  interest  rate 
benchmarks to risk-free rates published by central banks. The below summary of the responses 
follows this outline. 

85 

 
 
 
 
 
 
 
II.  Equipping competent authorities with supervisory powers to ensure the orderly cessation of a critical 

benchmark, 

The  Commission  argued  in  the  IIA  that  in  order  to  accompany  various  IBOR  phase-out  scenarios, 
regulators  need  more  extensive  and  finely  graduated  powers  to  monitor  and  accompany  the  industry-led 
IBOR transition process, and to intervene in it if there should be a market failure. This would include the 
power  to  mandate  the  continued  provision  of  a  critical  benchmark  using  a  different  methodology  or  the 
provision of a replacement rate 

A large number of respondents agreed with the problem identified by the Commission as well as 
the high-level proposals to amend the BMR.  

In  particular,  one  stakeholder  noted  that  the  issues  related  to  the  transition  to  risk  free  rates 
should indeed be at European level since this approach would avoid fragmentation risks linked to 
inconsistent  implementation  by  Member  States.  However,  it  highlighted  the  need  to  pay 
particular attention to the consequences arising from applying different fallback rules to different 
instruments.  Finally,  that  stakeholder  called  for  a  harmonized  approach  on  communication  and 
transparency issues related to the transition to risk-free rates. 

Another  stakeholder  noted  these  additional  powers,  which  should  not  be  limited  to  critical 
benchmarks,  are  best  placed  with  the  Commission  or  ESMA  and  that  further  clarification  is 
needed  on  how  and  in  which  situations  these  powers  would  be  exercised.  Two  respondents 
explicitly supported endowing NCAs or ESMA powers to determine a statutory replacement rate 
in  the  event  of  cessation  of  a  critical  benchmark  and  allow  its  use  in  legacy  contracts.  These 
respondents also noted that it is of particular importance to ensure that any replacement rate is a 
legal successor of the discontinued rate, to avoid legal uncertainty. 

Commenting on the scope of the measures aimed at helping stakeholders transition to risk-free 
rates, one respondent noted that they should apply to all agreements, regardless of whether they 
are subject the BMR or not. The same stakeholder welcomed the idea to reinforce the powers of 
competent  authorities  to  require  a  change  of  benchmark  methodology  and  even  impose  a  new 
methodology. However, it noted that such powers should be accompanied by provisions to ensure 
the  contractual  continuity  and  legal  certainty,  for  example  through  a  determination  that  the 
modified  benchmark  continues  to  measure  the  same  underlying  interest.  Alternatively,  that 
stakeholder suggested the BMR could specify that in case of a trigger event, the Commission or 
ESMA could designate a statutory replacement rate.  

Commenting  on  additional  powers  to  be  granted  to  NCAs,  one  stakeholder  advocated  for  the 
extension  of  “trigger”  events  for  remedial  action  to  reinforce  the  representativeness  of  a 
benchmark  as  well  as  for  additional  powers  underlying  such  remedial  action.  That  stakeholder 
was also supportive of granting NCAs powers to change a benchmark’s methodology such that it 
can be published as a tracker rate of the discontinued benchmark, thus ensuring its continuity. 

In support of introducing additional powers for NCAs, one respondent noted that they would help 
in  avoiding  the  undermining  of  administrator’s  credibility  by  withdrawing  or  suspending  its 
authorisation  or  registration  when  it  may  not  be  at  fault.  Somewhat  sceptical  about  giving 
additional powers to regulators with regards to benchmarks and its methodology, one stakeholder 
noted that it is the administrator who is better placed to remedy any issues with the benchmark 
methodology and that in case further powers are given to the NCA it is to be made sure that they 
86 

 
 
 
 
 
are  limited  to  critical  benchmarks.  Voicing  similar  concerns,  another  stakeholder  noted  that 
increasing the powers for an EU NCA to amend the methodology of a benchmark which is used 
by investors outside of the EU could have significant implications both for the benchmark and 
investors,  and  concluded  that  if  such  additional  powers  are  needed  in  connection  with  interest 
rate benchmarks, then they should be strictly limited to those benchmarks. 

III.  Ensuring  the  continued  availability  to  EU  users  of third  country  benchmarks  for  which 

no suitable alternative exists in the Union 

In the IIA, Commission has recognized that the third country regime provided by the BMR has had the 
unexpected effect of creating a risk of EU investors and businesses losing access to a number of non-EU 
benchmarks  on  which  they  depend  e.g.,  to  hedge  exposure  to  interest  rate  or  FX  risk  in  their  daily 
business.  Portfolio  managers,  in  turn,  risk  losing  access  to  specialised  strategy  indices  administered 
outside the EU. Therefore, with this initiative the Commission aims to ensure the continued availability of 
third country benchmarks for which no suitable alternative exists in the Union 

A number of stakeholders recognized the need to maintain access for EU benchmark users to a 
number of non-EU benchmarks on which they depend. 

One stakeholder noted that overall the BMR should exempt EU non- significant benchmarks and 
their equivalent third country benchmarks as well as public policy benchmarks, and that ESMA 
should be empowered to decide whether significant EU and third country benchmarks providers 
need to fulfil additional obligations. This was broadly echoed by another stakeholder, who also 
advocates narrowing down of the scope of BMR by  allowing all benchmarks to be used in the 
Union  unless  specifically  prohibited.  Two  stakeholders  suggested  that  the  endorsement  and 
recognition  process  should  be  streamlined  and  clarified,  either  in  the  BMR  or  via  an  RTS. 
Another stakeholder called for an extension of the transition period by another year. 

More  specifically,  regarding  the  use  of  third  country  FX  rates  in  non-deliverable  forward 
contracts,  one  stakeholder  specifically  called  for  sensible  legislation  that  would  allow  the 
continued use of FX spot rates as reference rates in such contracts beyond 2021 and proposed to 
align  Article  32(8)  and  Article  35  of  the  BMR  to  ensure  a  harmonized  approach  for  both 
authorized/registered and recognised entities. Yet another stakeholder agreed that prohibiting EU 
supervised entities from using these rates will have various significant adverse effects, including 
the loss of the ability for EU exporters to hedge their currency risk, forcing them to potentially 
withdraw from markets in countries where the FX benchmarks are not currently exempt from the 
BMR.  

On  the  other  hand,  one  stakeholder  opposed  rolling  back  the  scope  of  the  BMR,  instead 
advocating  more  targeted  measures  to  ensure  EU  users  can  access  third  country  benchmarks  – 
such as broadening the public policy exemption already present in the BMR and a temporary de 
minimis exemption. Another respondent noted that third country benchmarks should be required 
to meet standards equivalent to those applied to benchmarks produced within the EU, otherwise 
EU administrators would suffer a competitive disadvantage.  

2.3 Public consultation 

On  11  October,  DG  FISMA  published  a  public  consultation  intended  to  support  its  review  of 
Regulation 2016/1011 (the Benchmark Regulation). Stakeholders had until 31 December 2019 to 
express their views via the online EU Survey portal. 

87 

 
 
 
 
It is worthwhile noting that the RFR working groups for IBORs did not as such respond to the 
public consultation on the BMR review. However, its participants are financial institutions which 
have  expressed  their  views  on  the  issues  raised  in  the  consultation  through  their  respective 
industry  associations  or  individually.  Furthermore,  the  recommendations  for  fall-back  rates 
issued  or  to  be  issued  by  the  RFR  Working  Groups  will  present  a  compelling  route  for  the 
national competent authority to follow when exercising the powers that would be granted by the 
preferred policy option for the purpose of winding down IBOR legacy contracts. Indeed, it is not 
reasonably  feasible  that  the  relevant  competent  authority,  in  mandating  legacy  rates,  would 
deviate  from  the  recommendations  for  fall-back  rates  issued  by  industry  expert  groups  such  as 
RFR working groups. In this sense, there is a degree of intrinsic alignment between the preferred 
policy  option  and  the  views  of  the  RFR  Group  on  the  fall-back  rates  in  contracts  referencing 
LIBOR rates. 

This feedback statement provides a factual summary of the 85 unique responses received during 
this period. 

Outside  this  period,  a  number  of  other  responses  were  received,  including  from  ESMA.  Those 
responses are not included in this summary. 

Overview of respondents 

Figure 3 – Respondent’s main activity in relation to benchmarks 

Contributor 
5% 

Other 
25% 

Administrator 
37% 

User 
33% 

Figure 4 – Activity sector of respondent (more than one answer allowed) 

88 

 
 
 
Pension provision; 5 

Accounting; 2 

Credit rating 
agencies; 1 

Insurance; 8 

Contribution to 
benchmarks; 10 

Market 
infrastructure; 13 

Investment 
management; 13 

Other / non 
applicable; 19 

Benchmark 
administration; 33 

Banking; 32 

Benchmark use; 22 

Figure 5 – Location of respondents 

Denmark; 3 

Poland; 3 

Germany; 5 

United States; 5 

United Kingdom; 21 

Belgium; 11 

Netherlands; 6 

other EU; 6 

France; 8 

other non-EU; 9 

Spain; 8 

89 

 
 
 
 
 
The key messages emerging from the assessment of the responses to the consultation were:  

90 

 
 
 
I. 

Critical benchmarks 

Mainly benchmark users and most of the public sector respondents agreed with the proposal 
to  grant  more  powers  to competent  authorities  in order  to  require  the  administrator  of  a 
critical benchmark to change the methodology. They point out that “it is better to instruct an 
adjustment for  the  benchmark calculation  and  maintain  benchmarks,  then to  lose  an  important 
anchor  point  for  many  financial  contracts”.  The  respondents  believe  this  power  could  help 
ensuring  continuation  of  critical  benchmarks  and  avoid  potential  market  disruption  of  financial 
markets upon the cessation of a critical benchmark. For this reason, some of them claim that the 
reform should be carried on as soon as possible (and even before the entry into application of the 
new powers to ESMA). 

Users consider that such power would help to ensure contract continuity, however they underline 
the need to introduce safe harbour legislation to limit litigation risks as a result of such changes. 
They  suggest  competent  authorities  should  clearly  state  that  the  benchmark  still  calculates  the 
same economic reality – same benchmark). One stakeholder notes that granting such powers to 
competent authorities may also have the undesirable side effect that future transitions will not be 
orchestrated by the private sector itself but by regulators. Another stakeholder underlines that the 
circumstances under which those powers would be activated need to be clear (i.e. as a matter of 
last  resort).    One stakeholder  notes  that the  competent  authority  should  also  have  the  power  to 
request  provision  of  regulatory  reporting  data  or  data  held  by  custodians  to  the  benchmark 
administrator,  in  order  to  help  the  administrator  ensure  there  is  data  sufficiency,  as  laid  out  in 
IOSCO principles (MMSR or Bond/Commercial Paper/Certificate of Deposit data…). According 
to the same stakeholder, the change of methodology could also mean to move away from panel’s 
bank  contributions,  and  towards  a  fully  transaction  and  market  data  based  methodology  fully 
managed by the administrator. 

Public  sector  respondents  considered  that  it  would  be  better  if  the  administrator  makes  the 
change. However, they recognised that there might be situations where the administrator does not 
implement the necessary changes to the methodology (e.g. due to external pressure or opposing 
interests between various stakeholders). Due to the potential impact of such new powers on users 
of the affected benchmark located in various EU jurisdictions, one NCA suggests to ensure that 
key NCAs are involved in the decision process prior to implementing such power. 

Importantly, ESMA expressed support for granting additional powers to regulators to ensure an 
orderly cessation of a critical benchmark. ESMA recognized that regulators should be allowed to 
require a change of methodology also on the basis of their own assessment, whenever the critical 
benchmark  is  no  longer  representative  of  the  underlying  market.  Importantly,  it  also 
acknowledged  that  there  may  be  circumstances  in  which  a  benchmark  cannot  be  made 
representative  but  its  continued  publication  in  a  more  stable  and  sustainable  form  may  be 
desirable,  if  only  for  a  limited  wind-down  period.  Furthermore,  ESMA  noted  that  competent 
authorities should be able to allow for the continued publication of a benchmark if its cessation 
would result in frustration of existing contracts. It highlighted, however, that such powers should 
be  flexible enough  to  allow  the  competent authority to limit the  use  of that  benchmark  only  to 
certain  contracts  (e.g.  tough  legacy  contracts).  It  has  thus  expressed  broad  alignment  with  the 
Commission’s  policy  choice  to  enable  the  regulators to  mandate  the  publication of  a  substitute 
rate,  to  be  used  in  certain  existing  contracts,  in  order  to  ensure  smooth  cessation  of  a  critical 
benchmark.  

Furthermore, most of the participants noted that: 

91 

 
 
- 

 it  is  the  administrator  who  bears  the  main  risk  in  the  event  of  a  significant  change  in 
methodology.  Therefore,  setting  the  scope  of  new,  extended  powers  of  supervisory 
authorities should be preceded by a thorough impact assessment carried out by a panel of 
independent experts.  

-  Conditions should be clearly defined in the BMR.  
-  The  scope  of  supervisory  intervention  in  benchmark  methodology  should  be  precisely 

defined.  

-  Consideration should be given to limiting such corrective powers to formal guidance and 

approvals.  

-  The  legislative  amendment  envisaged,  if implemented,  should  account for the  potential 

risk of civil litigation initiated by parties to financial contracts. 

One benchmark administrator was moderately in favour and underlined that “new powers for a 
competent  authority  to  require  the  administrator  of  a  critical  benchmark  to  change  its 
methodology  would  have  to  be  limited  to  specific  and  pre-determined  circumstances  and  be 
proportionate.” 

All  benchmark  administrators  but  one,  some  benchmark  users,  associations  and  one 
respondent from the public sector did not agree with empowering competent authorities with a 
tool to force an administrator to change the methodology against its will. In their view, this would 
create  a  situation  where  the  continuity  of  the  benchmark  will  be  questioned  and  where  the 
administrator  and  contracting  parties  might  risk  litigation.    All  argued  that  the  BMR    already 
provides that the oversight committee of the administrator and the competent authority have to 
periodically  evaluate  the  methodology  and  the  relevant  market.  (Art  5.3.a)  Those  stakeholders 
consider  that  NCAs  should  take  into  account  the  liability  issues  arising  from  the  decision  to 
impose  a  change  of  methodology.  All  administrators  underlined  the  consequences  in  terms  of 
significant risks to the operator of a derivatives market referencing the benchmark, resulting in 
market  uncertainty  and  potential  market  instability.  Two  respondents  considered  that  the  NCA 
might not have as much market intelligence or be aware of all the impacts of the changes as the 
administrator.  Some  of  them  expressed  concern  that  this  power  could  affect  also  benchmarks 
different  from  IBORs  and  would  like  the  power  to  be  limited  to  IBORs  and  not  to  all  critical 
benchmarks. One administrator underlined that the new  measures could create reputational and 
litigation risks for administrators as well as market uncertainty and instability. In their view, these 
changes “would effectively constitute a nationalisation of the benchmark in the absence of any 
compliance issue”. 

A majority of respondents agreed that corrective powers should not apply to critical benchmarks 
at  all  stages  in their  existence  and that  these  powers should  be  confined to  situations when  a 
contributor  notifies  its  intention  to  cease  contributions.  A  majority  also  agreed  that  is  the 
exercise of those powers should be confined to situations in which mandatory administration 
and/or contributions of a critical benchmark were already triggered. 

A  majority  of  respondents  considered  that  further  changes  to  the  BMR  would  be  needed  to 
improve  the  robustness,  reliability  or  representativeness  of  the  benchmark.  One  respondent 
advocated for a mechanism ensuring support by the supervisory authority for the administrator 
and for panel banks. Several respondents advocated for a validation by competent authorities of 
the benchmarks methodology prior to the launch of the benchmark. Another respondent called for 
more  information  on  changes  in  methodology,  including  the  concerned  users  of  such 
benchmarks.  Another  stakeholder  advocated  for  cooperation  between  the  competent  authority 
with  key  financial  markets  stakeholders  (i.e.  Central  Banks,  Treasury)  and  the  relevant  market 
92 

 
 
associations to facilitate the development of liquid markets in instruments that would underlie the 
transactional  support  of  financial  benchmarks.    A  respondent  suggested  that  administrators 
should  receive  more  means  to  make  effective  changes  in  its  methodology  and  ensure  the 
representativeness  of  the  panel;  as  an  example  administrators  should  be  granted  access  to 
regulatory  reporting  data  and  statistics  for  the  purpose  of  assessing  the  benchmark’s 
methodology.  It  was  also  suggested  to  introduce  power,  or  the  obligation,  for  a  competent 
authority  to  certify  that  the  benchmark,  after  a  change  in  methodology,  still  reflects  the 
underlying interest.  

An administrator and a competent authority advocated for the introduction of automatic criteria 
for  contributions  to  a  critical  interest  rate  from  e.g.,  all  MMSR  reporting  banks;  all  credit 
institutions with an exposure to EURIBOR above a certain level should be required to contribute 
to  the  benchmark.  One  respondent  suggested  to  consider  increasing  the  frequency  of  the 
administrator’s determination of representativeness in Article 23(2) from 2 years to 1 year. Two 
stakeholders aimed at introducing the power for competent authorities to compel administration 
of  a  critical  benchmark  under  article  21  for  longer  than  5  years,  where  necessary  to  prevent 
market disruption, given the extended maturity if certain legacy exposures for all banks that use 
the rate above a given threshold. One respondent suggested that regulators/administrators should 
be  required  to  seek  regular  feedback  from  buy-side  firms  and  other  end  users  on  benchmark 
methodology.  One  respondent  suggested  that  the  change  in  methodology  or  a  mandatory 
contribution should not be triggered when a less significant contributor ceases to contribute. 

A  slight  majority  appeared  to  be  in  favour  of  requiring  approval  of  benchmark  cessation 
plans  by  a  competent  authority.  Against  this  option  it  was  argued  that  it  might  shift 
responsibility to prepare for eventualities from the administrators, with whom it should rest, to its 
competent authority. Other arguments against this proposal mentioned  (i) resource constraints at 
competent  authorities  and  (ii)  administrative  burdens,  as  well  as  (iii)  the  fact  that  the  BMR 
contains insufficient material guidance on what the cessation plans should contain. Respondents 
in  favour  argued  that  cessation  plans  approved  by  a  competent  authority  would  instil  more 
confidence  in  market  participants,  or  that  the  measure  might  be  proportionate  for  critical 
benchmarks. In the latter case, it would be for the supervisory college to approve the plans. Also, 
it  was  suggested  that  these  cessation  plans,  for  critical  benchmarks  at  least,  should  be  made 
public. 

Although this was not the subject of the question, a number of respondents also commented on 
the potential approval of contingency plans of benchmark users by a competent authority. This 
measure  was  considered  to  be  disproportionate  and  potentially  disruptive,  since  there  might  be 
fragmentation in the supervisory practice between the various national regulators. 

A slight majority was opposed to expanding the scope of contingency plans to also cover the 
case where a critical benchmark loses representativeness. Respondents against cited, among 
other  things,  the  fact  that  the  “loss  of  representativeness”  scenario  would  be  hard  to  define 
legally. Notably, a benchmark user cannot itself be responsible to assess representativeness of a 
benchmark. Commenting on the current drafting of Article 28(2), respondents on the user side of 
the spectrum found that the concept of “material change” continues to be unclear. 

Respondents  on  the  other  side  made  a  mirroring  argument:  the  requirement  would  be  feasible, 
provided  “loss  of  representativeness”  is  defined  and  benchmark  administrators  are  obliged  to 
disclose when this happens. Several respondents also believe it would be good to clarify the exact 
extent  of  Article  28(2)  for  the  case  where  a  critical  benchmark  is  found  no  longer  to  be 

93 

 
 
representative. Several respondents also noted the appearance of a market practice to include fall-
back  provisions  in  e.g.,  bonds  that  are  triggered  by  a  statement  from  a  competent  authority 
attesting  the  non-representativeness  of  a  benchmark  (a  so-called  “pre-cessation  trigger”),  and 
questioned whether it would be useful to impose this market-wide in the BMR. Other benchmark 
users  advocated  for  ESMA  to  develop  uniform  fall-back  conventions  for  critical  benchmarks. 
Finally, a respondent stressed the necessity of alignment between the contingency plans drawn up 
by  the  administrator  and  the  plans  that  benchmark  users  should  maintain,  adding  that  it  was  a 
prerequisite  that  the  administrator  makes  available  all  relevant  information  to  its  benchmarks’ 
users. 

A  majority  was  generally  positive  to  neutral  on  the  appropriateness  of  the  system  of 
supervision  by  colleges.  Colleges  are  generally  seen  as  a  good  way  to  ensure  exchange  of 
information and to bring together competent authorities responsible for the administrator, for the 
contributors and for the users of critical benchmarks. Those respondents that made suggestions 
commented  on,  inter  alia,  the  transparency  of  the  colleges,  which  could  be  improved  in  their 
view. Respondents also comment on a high degree of uncertainty in relation to the functioning of 
the  colleges  after  the  entry  into  application  of  the  ESAs  review  (and  the  transfer  of  the 
supervision of the administrators of EU critical benchmarks to ESMA). On competent authority 
called for an increased role of colleges to ensure convergence in the supervision of benchmark 
contributors.  Finally,  there  also  appear  to  be  questions  as  to  the  supervision  of  LIBOR  post-
Brexit. 

II. 

Authorisation and registration  

A  majority  of  respondents  find  that  it  is  currently  insufficiently  clearly  set  out  in  the 
current  text  of  the  BMR  whether  a  competent  authority  has  the  powers  to  withdraw  or 
suspend  the  authorisation  or  registration  of  an  administrator  in  respect  of  one  or  more 
benchmarks only. Less than a quarter found it rather clear or very clear that they do. 

A  few  respondents,  including  national  competent  authorities,  were  even  of  the  opinion  this 
interpretation would be contrary to the current text of the BMR. Several respondents added that 
they  would  welcome  a  clarification  in  this  regard.  One  respondent  stressed  that  a  competent 
authority  should  have  the  option  to  decide  whether  a  shortcoming  affects  one  or  several 
benchmarks or the administrator as an entity, and should act accordingly. No respondents are of 
the opinion that suspension or withdrawal of authorisation should always affect all benchmarks 
provided by an administrator. 

In  general,  respondents  commented  on  the  tension  between  this  welcome  clarification,  and  the 
general  principle  of  the  BMR  to  authorise  /  register  at  administrator  level.  Moreover,  several 
respondents  observed  that  this  understanding  would  be  at  odds  with  the  way  the  benchmark 
register  currently  works,  listing  only  the  administrator  for  EU-registered  or  -authorised 
administrators, thus leading to the presumption that all of their benchmarks would be fit for use 
in  the  Union.  Another  respondent  made  a  similar  comment,  stressing  the  importance  of 
transparency  and  clear  communication  to  benchmark  users  if  a  benchmark  is  the  subject  of 
suspension or withdrawal. 

A clear majority of respondents are of the opinion that the current powers of NCAs to allow 
the  continued  provision  and  use  in  existing  contracts  for  a  benchmark  for  which  the 
authorisation has been suspended are currently not sufficient, and argue for an expansion, 
at  least  to  cover  also  the  case  of  withdrawal  of  authorisation  /  registration.  In  their  comments, 
respondents explain that the difficulties faced in switching off a non-compliant benchmark could 
94 

 
 
be  alleviated  by  allowing  the  continued  provision  of  a  non-compliant  benchmark  for  legacy 
contracts, at least for a sufficient grace period (12 months is cited as an example). However, users 
also  cite  the  potential  civil  and  contract  law  problems  they  may  face  in  continuing  to  use  a 
benchmark whose reliability may have been tainted by e.g., manipulation. 

A  limited  number  of  respondents  specifically  advocate  for  a  broad  application  of  this 
grandfathering principle to third country benchmarks, where they anticipate that a large number 
of  benchmarks  will  not  meet  the  standard  to  be  used  for  new  contracts  after  the  end  of  the 
transitional period. These respondent also argue in favour of an exemption for new contracts that 
would  be  used  to  ‘manage  down’  legacy  positions.  One  respondent,  representing  market 
infrastructures,  considers  that  the  BMR  should  be  firm:  if  the  NCA  has  opted  to  withdraw  an 
administrator’s  license,  it  can  be  presumed  to  have  done  so  in  full  knowledge  of  the 
consequences. 

Views were mixed among stakeholders as to whether the powers of competent authorities are 
appropriate  to  permit  continued  use  of  a  benchmark  when  cessation  of  that  benchmark 
would result in contract frustration, with as many of the opinion that the current set of powers 
is  appropriate  as  that  additional  powers  should  be  granted.  One  respondent  mentions  the 
possibility of legislative intervention to accompany benchmark transition, as was done in 1999 to 
move from the various national IBORs to EURIBOR. Another respondent calls on power to be 
conferred  on  the  European  Commission  to  nominate  a  successor  benchmark  where  a  critical 
benchmark is to be phased out. 

III. 

Scope of the Benchmark Regulation 

The  majority  of  respondents  consider  that  the  regulatory  framework  applying  to  non-
significant  benchmarks  should  be  better  calibrated  with  mixed  views  on  possible  re-
calibrations. Half of the respondents consider that a benchmark should be both quantitatively and 
qualitatively material i.e. satisfy both criteria in Articles 24(1)(a) and (b) in order to be deemed 
significant  while  a  benchmark  that  only  satisfies  a  single  criterion  should  be  deemed  non-
significant.  Some  respondents  consider  the  overall  compliance  requirements  disproportionate, 
emphasizing  the  importance  of  the  proportionality  where  requirements  should  differentiate  in 
respect of the various types of benchmarks and the proportionality should focus on size and risks 
of each benchmark and administrator (particularly lack of transparency, conflicts of interest) and 
should allow to remove excessive administrative burden. 

A  third  of  respondents  indicate  that  both  EU  and  third  country  non-significant  benchmarks 
should  be  excluded  from  the  scope  of  the  Regulation,  in  line  with  most  of  the  third  country 
jurisdictions  which  tend  to  limit  regulation  and  supervision  to  critical  benchmarks  of  systemic 
importance. According to respondents the current regulatory framework creates disadvantages for 
EU  benchmarks  administrators  while  third  country  administrators  may  not  be  incentivised  to 
keep  providing  non-critical  benchmarks  in  the  EU  if  they  are  required  to  comply  with  the 
relevant  provisions  of  BMR,  notably  to  have  a  legal  representative  located  with  the  EU.  Some 
respondents,  including  industry  representatives  and  public  authorities,  are  of  the  view  that 
exclusions should not relate to benchmarks that are more subject to manipulations and climate-
related benchmarks.  

Finally,  a  few  respondents  consider  that  the  regulatory  framework  applying  to  non-significant 
benchmarks  is  adequately  calibrated  and  it  is  too  early  to  assess  any  need  for  re-calibrations, 
which could only be considered after a few years of effective implementation and use of BMR 
requirements.  Respondents  also  consider  that  the  framework  provide  for  sufficient  exemptions 
95 

 
 
for  administrators  of  non-significant  benchmarks  as  compared  to  critical  and  significant 
benchmarks.  

On the issue of third country FX spot rates referenced in non-deliverable forward contracts, some 
respondents stressed that such spot rates should be excluded from the Regulation as long as they 
are administered  by  public  authorities  or assimilated bodies.  Alternatively,  respondents  suggest 
the  definition  of  'public  authorities'  to  be  expanded  to  include  third-country  administrators  of 
non-deliverables forwards (NDFs). In particular, ESMA agreed that the prospective inability of 
the EU market participants to use these third country FX spot rates is indeed an issue and that the 
Commission’s preferred option to deal with the problem, by exempting certain third country FX 
spot rates via extending the existing public policy rate exemption, may indeed be appropriate, as 
this would preserve the integrity of the BMR’s existing third country regimes and would allow 
businesses to continue to hedge their currency risks by using these benchmarks. 

A  large  majority  respondents  consider  that  quantitative  thresholds  (such  as  the  volume  of 
transactions on the benchmark or the size of the underlying economy) would be the most 
objective  and  transparent  approach  to  ensure  a  harmonised  establishment  of  categories  of 
benchmarks. However almost all respondents indicate that experiences show that quantifying the 
use  of  benchmarks  is  an  extremely  complex  exercise,  given  the  difficulty  for  administrators  to 
adequately  monitor  the  thresholds  which  puts  the  reliability  of  the  resulting  calculations  into 
question.  For respondents these  difficulties  cause some  administrators  not  to take  advantage  of 
the exceptions available for non-significant benchmarks.  

For  the  majority  of  respondents  an  alternative  approach  based  on  a  mix  of  quantitative  and 
qualitative criteria would be preferable for all the categories of benchmarks, similarly to what the 
Regulation already foresees for ‘critical benchmarks’ where experience has shown to be the good 
approach.  Some  respondents  would  suggest  a  role  for  ESMA  to  ensure  a  uniform  approach 
throughout  the  Union  and  avoid  the  potential  risk  of  divergent  applications  which  could  also 
drive the choice of benchmark administrators for requesting the registration of benchmarks. For 
some  respondents  ESMA  should  also  be  responsible  for  determining  whether  a  benchmark  is 
critical, significant or non-significant, nothing that non-significant benchmarks are likely to have 
greater impact in specific jurisdictions rather than across the Union. Respondents indicate that the 
oversight from ESMA would allow gather feedback from the national competent authorities and 
end users as to ensure that the administrator’s decision to opt out of any requirements under the 
Regulation  does  not  have  an  adverse  effect  on  benchmark  users.  Few  respondents  would  also 
favour  the  creation  of  a  dedicated  committee,  which  would  include  index  industry  experts,  to 
develop  and  apply  qualitative  criteria  for  the  establishment  of  a  public  list  of  significant 
benchmarks to update periodically. For some respondents a mix approach would help define the 
status of third country benchmarks with respect to the existing benchmark categories, noting that 
third country administrators face significant difficulties in accessing data to quantify the usage of 
their benchmarks within the EU when applying for recognition. A few respondents consider that 
the  assessment  of  a third country  benchmark’s  impact  on  market  integrity  or financial stability 
should also be part of the qualitative criteria. 

Few respondents suggest the quantitative threshold for significant benchmarks be increased from 
a total average value of EUR 50 billion over six months to EUR 100 billion over the same period 
as a more appropriate threshold to capture benchmarks whose discontinuation or material change 
would have a significant and adverse impact on one or more Member States. Few others suggest 
that, in situations where a benchmark is critical for the functioning of the financial markets and 
the  economy,  the  competent  authority  should  have  the  power  to  deem  the  benchmark  as  a 
96 

 
 
national  critical  benchmark  based  on  qualitative  criteria,  even  though  that  benchmark  does  not 
meet  the  quantitative  threshold  criteria.  This  might  be  the  case  for  non-euro  countries  where 
IBOR benchmarks are locally critical but the underlying value is below threshold.  

Finally,  very  few  respondents  consider  would  welcome  the  complete  abolition  of  quantitative 
thresholds  which  could  solely  remain  as  indicative  guide  for  the  competent  authorities  when 
designating  which  benchmarks  are  significant  or  critical.  One  respondent  would  recommend  to 
build a mapping of the different categories of existing benchmarks at the EU level which could 
help  for  informed  considerations  on  appropriateness  of  quantitative  threshold  and  other 
qualitative criteria. 

A  majority  of  respondents  consider  that  the  calculation  method  used  to  determine  the 
thresholds  for  significant  and  critical  benchmarks  is  appropriate,  albeit  with  opportunities 
for  possible  adjustments.  A  third  of  respondents,  including  industry  stakeholders  and  public 
authorities,  consider  the  calculation  method  not  appropriate  due  to  the  significant  challenges 
encountered  with  the  unavailability  of  data  that  should  be  used  to  determine  the  thresholds. 
Respondents  would  recommend  the  calculation  methodology  to  only  reference  data  available 
under EU regulations repositories, excluding data which are either not publicly available or only 
partially available or not centralised.  

Some  respondents  indicate  that  the  lack  of  a  ‘golden  source’  of  data  is  an  important  issue  for 
third-country administrators seeking to identify their member state of reference for the usage of a 
benchmark in the Union for the purpose of recognition. Few respondents also refer to issues with 
regard to financial products such as funds or structured products that have a primary listing in a 
third  country  but  are  redistributed  to  EU  investors  with  the  difficulty  to  calculate  the  exact 
exposure  in  the  EU  due  to  lack  of  clarity  whether  the  underlying  indices  can  be  considered  as 
benchmarks or not. 

Finally, some respondents express mixed views with regard to the alternative methodology and 
the ‘best effort basis’52 approach. A few respondents are supportive of alternative source of data 
if  the  information  cannot  be  accessed  or  is  not  sufficiently  reliable,  also  suggesting  that  all 
threshold  calculations  under  the  regulation  should  be  done  on  a  reasonable  best  efforts  basis, 
regardless the data sources. A few others consider that the usage of alternative source of data may 
undermine the objective of a harmonised and consistent approach in the calculation method and 
would  rather  suggest  the  competent  authority  to  review  the  calculation  in  conjunction  with  the 
administrators to allow for a more consistent approach in the designation of benchmarks.  

A  large  majority  of  respondents  consider  an  alternative  approach  completely  appropriate 
for benchmarks that are less prone to manipulation and that the methodology could include 
some proportionality looking at key areas such as the ’use of discretion’, ‘conflict of interests’ or 
‘risk  of  manipulation’.  Respondents  believe  it  is  important  that  the  Regulation  continues  to 
provide a framework for a robust governance structure for the administrators. For the majority of 
respondents regulated data benchmarks, where input data is regulated at its source (i.e. produced 
by  regulated  trading  venues  subject  to  continuous  oversight),  should  be  exempted  from  the 
regulation  or  at  least  be  subject  to  reduced  regulatory  burden  (i.e.  authorisation/registration 
requirements seem unjustified). A few respondents consider that the definition of regulated data 

52 As under Commission Delegated Regulation (EU) 2018/66 

97 

 
 
                                                           
benchmarks  category  should  cover  a  substantial  number  of  third  country  benchmarks  and  not 
exclusively derivatives.  

Some respondents call for a more flexible regulatory approach for other type of benchmarks such 
as the proprietary indices which are solely used in over the counter transactions or benchmarks 
based on the reporting of underlying transactions i.e. risk free rates. A few respondents consider 
that current provisions do not take into account the different risk profile of physical commodities 
benchmarks  which  are  by  essence  less  prone  to  distortion  caused  by  financial  flows  as 
predominantly used to manage the risks along the supply chain.  

Finally,  a  minority  of  respondents  state  that  an  alternative  approach  is  neither  appropriate  nor 
feasible and believe that all types of benchmarks are open to potential manipulation, hence the 
quantitative assessments based on thresholds are the most suitable ones. A few respondents also 
refer  to  the  Market  Abuse  Regulation  which  prohibits  all  market  manipulation  and  express 
concerns  by  a  classification  which  could  categorise  certain  benchmarks  as  less  prone  to 
manipulation  (i.e.  potentially  the  case  for  equity  benchmarks),  implying  that  others  are  more 
prone to manipulation. 

IV.  Non-EEA benchmarks 

A large majority replied that the potential issues in relation to FX forwards did affect them 
much  or  even  very  much.  Several  respondents  explained  that  the  current  regulation  will  likely 
result  in  third  country  benchmarks  in  non-deliverable  FX  forwards  for  not  fully  convertible 
currencies, no longer being allowed. This would lead to a severe impact due the fact that many 
FX  exposures  could  no  longer  be  fully  hedged.  The  solution  that  is  suggested  by  most  of  the 
respondents who claimed to be affected by this, is to exclude third-country administrators of FX 
spot  rates  in  not  fully  convertible  currencies  from  the  benchmark  regulation.  More  concretely, 
this  could  be  done  by  expanding  the  definition  of  ‘public  authority’  so  that  it  includes 
administrators of FX rates. In addition, several respondents point out that regulators should reach 
out to relevant third country providers and where possible declare them equivalent. Furthermore, 
one  respondent  suggests  that  ESMA  should  operate  a  system  to  designate  whether  non-EEA 
benchmarks  are  critical  with  regard  to  financial  stability.  Only  the  benchmarks  that  are 
designated  as  critical  would  require  authorization.    Finally,  one  respondent  suggests that,  since 
EMTA monitors the fixing rates of non-deliverable forwards as determined by central banks, to 
investigate whether a cooperation with EMTA is possible.  

A  majority  of  respondents  indicated  that  the  possibilities  for  third  country  benchmark 
administrators  to  have  access  to  EU  markets  are  insufficient  and  that  this  could  be 
problematic. There are respondents who have not been made aware of issues or who argue that 
the current system works fine and that the lack of applications to be either recognized or endorsed 
is due to the extension of the transitional period. The respondents who are of the view that the 
possibilities  for  third  country  benchmark  administrators  to  access  EU  markets  are  insufficient 
provide a variety of arguments to substantiate their position. A potential problem with regard to 
the equivalence regime is that not many countries have benchmark legislation, and the countries 
that do (or will) have benchmark legislation, focus on significant of critical benchmarks, leaving 
a  vast  amount  of  benchmarks  out  of  scope  of  an  equivalence  decision.  For  endorsement  and 
recognition  the  costs,  the  identification  of  the  member  state  of  reference  and  the  (absence  of 
clarity  surrounding  the)  responsibilities  and  liabilities  of  the  endorsing  entity  or  the  legal 
representative are mentioned as major obstacles. This is especially the case for benchmarks that 
are provided free of charge, or against a small fee. Furthermore several respondents questioned 

98 

 
 
the  usefulness  of  the  criterion  that  there  needs  to  be  an  objective  reason  for  a  third  country 
benchmark  to  be  endorsed  for  their  use  in  the  Union.  One  respondent  raises  concerns  on  the 
definition of ‘regulated data benchmarks’. Their limitation to EU or equivalent regulated venues 
deprives  EU  investors  from  access  to  a  variety  of  innovative  index  options  and  access  to 
emerging  markets.  This  definition  has  furthermore  lead  to  the  Swiss  regulated  market  data  not 
being  regulated  data  anymore  due  to  the  decision  that  the  Swiss  regulated  markets  no  longer 
where equivalent.  

A  variety  of  solutions  has  been  offered  by  the  respondents.  Some  respondents  stress  the 
importance of interaction between EU and third country authorities and regulators about the 
consequences  of  not  having  third  country  benchmarks  recognized.  Furthermore  several 
respondents  ask  the  Commission  for  clarification  or  alteration  of  the  responsibility  of  the 
endorser  or  the  legal  representative,  the  requirement  of  having  an  objective  reason  for 
endorsing the use of a third country benchmark in the Union, the criterion that a benchmark is 
‘used’ in the Union, how to determine the member state of reference and the roles of ESMA and 
the NCA’s. It is suggested that it is important that the  framework applies equally to EU and 
non  EU  benchmark  administrators  and  that  the  rules  should  not  just  apply  to  critical 
benchmarks.  Several  respondents,  however,  also  argue  that  non-significant  and/or  non-critical 
third  country  benchmarks  should  be  exempted  or  out  of  scope  of  the  regulation  since  the 
cessation  of  these  benchmark  are  unlikely  to  pose  a  threat  to  the  financial  stability  or  market 
integrity. One respondent suggests that they should be out of scope for as far as they are used in 
contracts  with  professional  parties.  It  is  suggested  that  the  use  of  those non-significant  or non-
critical  benchmarks  is  allowed  unless  ESMA  has  declared  them  significant  or  critical  and 
requires  authorization.  Some  respondents  suggest  to  declare  out  of  scope  certain  specific 
benchmarks,  such  as  foreign  exchange,  interest  rate  and  regulated  data  benchmarks.  Potential 
investor  protector  issues  could  be  addressed  through  disclosure  requirements  for  certain  out  of 
scope  benchmarks.  Alternatively  it  is  suggested  that authorization  of  third  country  benchmarks 
should be granted when an independent third party auditor declares that the IOSCO principles are 
complied with. Finally, one respondent mentions that the regulation should provide for sufficient 
safeguards  with  regard  to  third  country  benchmarks  that  will  be  prohibited.  This  means  that 
legacy  contracts  should  be  protected  in  order  to  not  cause  market  disturbances  and  that,  for  a 
sufficient  period  of  time,  reference  to  non-qualifying  benchmarks  is  allowed  in  order  to  give 
market parties enough time to adjust to a decision of supervisory authorities. 

99 

 
 
 
 
ANNEX 3: WHO IS AFFECTED AND HOW? 

3.1 

Practical implications of the initiative 

3.1.1. Business loan exposures to USD LIBOR 

Table 9 – Business loan exposure to USD LIBOR across maturity ranges. 

Syndicated loans 

Outstanding Volumes (Q4 2012) 
$3.4 trillion 
- US market: $2.5 trillion 
- Non-US: $0.9 trillion 

Corporate business loans 
(bilateral) 

$1.65 trillion 
- Some overlap may exist with 
syndicated loans 

Non-corporate business 
loans 

$1.25 billion 

CRE/Commercial 
mortgages 
Floating/Variable Rate 
Notes 

$3.6 trillion 

$1.5 trillion 
- 24% of issuance volume nondomestic1 

Relation to LIBOR 
97% LIBOR linked1 
- Primarily 3 month and 1 month 
- ~10% of deals linked to 6m tenor 
<0.01% T-Bill linked 
30-50% LIBOR linked (Higher proportion for 
larger exposures) 
- Primarily 1m and 3m tenors 
- Some 6m linked 
<2% Linked to T-bills 
Assumed 30-50% LIBOR linked 
- Primarily 1m and 3m tenors 
<2% Linked to T-bills 
Assumed 30-50% LIBOR linked 
- Primarily 3m 
84% of issuance linked to LIBOR1, of which 
- 42% linked to 1m 
- 53% linked to 3m 
- ~0.5% linked to 6m 
- ~0.5% linked to 12m 
0.1% of issuance linked to T-bills 

4.  Source: Dealogic, Federal Reserve, World Bank, BIS quarterly review, Oliver Wyman analysis 
5.  Note: Based on 2012 issuance, DG FISMA interviews indicate that the breakdown is still relevant today. 

According  to  fact-finding  interviews  by  DG  FISMA  staff,  the  following  amounts  of  global 
LIBOR exposures can be attributed to the balance sheet of European banks (the categories do not 
perfectly  overlap  with  the  ones  used  by  Dealogic,  but  the  below  estimates  indicate  that  a 
considerable amount of existing LIBOR exposures originate in the European Union. 

- 

- 

- 

- 

$3.4 Trillion in business loans 

$1.3 Trillion in retail mortgages and consumer loans 

$1.8 Trillion in floating rate/variable rate debt 

$1.8 Trillion in securitized products 

3.1.2. Impacts of USD LIBOR cessation on EU vs US banks 

The table below provides an overview on the stylised balance sheet of the different impact the 
cessation of USD LIBOR has on a European bank (represented as the bank that borrows USD 
from wholesale sources) vs a US bank that has USD assets in the form of retail deposits. 

European wholesale bank 

Pre-USD LIBOR cessation 

Post USD LIBOR cessation 

Liabilities 
Deposits (30) 

Assets 
HQLA (30) 

Liabilities 
Deposits (30) 

Assets 
HQLA (30) 

FX swaps (20) 
Term debt (20) 
Money markets (20) 

Floating rate loans (40) 

Fixed rate loans (30) 

FX swaps (20) 
Term debt (20) 
Money markets (20) 

Floating rate loans (40) 

Fixed rate loans (30) 

100 

 
 
 
Equity (10) 

Equity (10) 

Total (100) 
USD LIBOR (60) 
LIBOR hedge (0) 

Total (100) 
USD LIBOR (70) 
LIBOR hedge (0) 

Open LIBOR risk (0) 

Total (100) 
USD LIBOR (40) 
LIBOR hedge N/A 
Open (unhedged) LIBOR risk (40) 

Total (100) 
USD LIBOR (0) 
LIBOR hedge N/A 

Pre-USD LIBOR cessation, the wholesale bank has matched liabilities and assets that reference 
LIBOR or are swap hedged to a LIBOR rate (the shaded areas in the first two columns of the 
table above – short-term debt and equity at 70 vs fixed and floating rate corporate loans at 70). 
Post USD LIBOR cessation, the wholesale bank’s loan book will reference a SOFR rate rather 
than  LIBOR.  In  consequence,  the  wholesale  bank  has  a  mismatch  between  the  cost  of  its 
unsecured  liabilities  where  borrowing  cost  continues  to  reflect  “unsecured”  credit  risk, 
previously reflected in the LIBOR rate (40), and a loan portfolio that is creating cash flows at 
SOFR.  As  LIBOR  is  no  longer  published,  the  wholesale  bank  can  no  longer  hedge  this 
mismatch (basis risk) with LIBOR based derivatives. 

US deposit taking bank 

Pre USD LIBOR cessation 
Liabilities  
Deposits (60) 

Money markets (10) 
Term debt (20) 
Equity (10) 

Assets 
HQLA (20) 
Floating rate loans (40) 

Fixed rate loans (40) 

Post USD LIBOR cessation  
Liabilities  
Deposits (60) 

Assets 
HQLA (20) 
Floating rate loans (40) 

Money markets (10) 
Term debt (20) 
Equity (10) 

Fixed rate loans (40) 

Total (100) 
USD LIBOR (40) 
LIBOR hedge (0) 

Total (100) 
USD LIBOR (80) 
LIBOR hedge (40) 

Open LIBOR risk (0) 

Total (100) 
USD LIBOR (10) 
LIBOR hedge N/A 
Open (unhedged) LIBOR risk (10) 

Total (100) 
USD LIBOR (0) 
LIBOR hedge N/A 

Pre-USD  LIBOR  cessation,  the  US  deposit-taking  bank  has  a  significant  percentage  of  USD 
deposits  as  a  source  of  funding  and,  in  consequence,  relies  less  on  wholesale  funding  in 
unsecured markets. It has more assets that track USD LIBOR than USD LIBOR liabilities.  

Post USD LIBOR cessation the deposit-taking bank will have assets that reference SOFR rather 
than LIBOR and only a small percentage of borrowing that references a rate that correlated to the 
present LIBOR (money markets at 10). This (unhedged) mismatch is much smaller than that of 
the European wholesale bank (40). 

3.1.3. EU banks main USD financing sources 

In  order  to  describe  the  differential  effects  of  a  USD  LIBOR  phase-out,  it  is  useful  to 
describe  the  USD  financing  sources  available  to  non-US  banks.  For  those  banks  with 
insufficient USD deposits on their balance sheet, there are three main sources of obtain 
USD funding: (1) Short term wholesale borrowing; (2) FX currency basis swaps; and (3) 
offshore  dollar  deposits.  For  funding  emergencies,  there  are  also  (4)  FX  swap  lines 
available through central banks, but such emergency funding does not reference LIBOR 
and depends on swap lines being established among the relevant central banks. 

Table 10 – EU banks’ wholesale funding sources 

Short-term 

FX currency swaps 
101 

Offshore USD deposits 

Central bank 

 
 
  
 
 
 
wholesale USD 
borrowing 

Term deposits, 
certificates of 
deposit, floating rate 
notes, money market 
instruments 

Short-
term 
(below 1 
year) EU 
bank 
funding 
sources 

Reference 
rate for 
short term 
EU banks 

Three or six month 
LIBOR (directly or 
as a fixed rate 
“swapped” back to 
LIBOR) 

EU banks with an 
international client base 
are able to rely on 
offshore USD deposits, 
which are not covered by 
the IHC rules. These 
offshore USD are, 
however, not sufficient to 
finance the entirety of an 
active USD loan book 
Corporate account holders 
accept the USD offshore 
rate as they are 
speculating on an 
appreciation of USD 
against the EUR or GBP. 

Liquidity swap lines  

The Federal Reserve 
can extend a USD 
liquidity swap lines to 
the ECB. The ECB can 
then hand out the USD 
to EU banks in its 
jurisdiction 

During the 2008 
financial crisis banks 
borrowed through 
swap line facilities at a 
rate of OIS plus 100 
basis points. The 
FOMC dropped the 
rate to OIS plus 50 bps 
in November 2011. As 
part of the coronavirus 
crisis, new facilities 
will be offered at OIS 
plus 25 bps53 

Often the only way non-
US banks can access the 
USD necessary for USD 
denominated corporate 
lending, as trade finance 
is predominantly 
denominated in USD 

European bank borrows 
USD and pays interest 
on USD LIBOR while 
the US counterpart pays 
interest for euros on the 
basis of EURIBOR. As 
USD is in much higher 
demand than EUR, the 
EURIBOR rate is 
usually EURIBOR 
minus 5 basis points, 
sometimes as low as 
EURIBOR minus 50 
basis points 
(“adjustment spread”) 

Bonds (1 year plus), 
paper issuance 
programmes and, 
where available, 
wholesale deposits 

Medium 
Long 
Term 
(MLT) 
funding 
(1 year 
plus) 
Reference 
rate for 
medium 
term 
funding  
Source for the above: FISMA interviews with five leading EU corporate lending institutions 

EU banks with an 
international client base 
are able to rely on 
offshore USD wholesale 
deposits, which are not 
covered by the IHC rules 

Fixed rate, often 
“swapped back” to 
LIBOR for risk 
management 
purposes 

Term deposit rate as 
applicable in the relevant 
currency area 

3.1.4. Break down of derivatives exposures 

The  table  below  represents  the  derivatives  exposures  of  a  major  European  corporate 
bank. The table shows that, even for derivatives, the legacy issues will not be addressed 
entirely  by  an  ISDA  protocol.  Just  more  than  half  (57%)  of  the  contracts  are  written 
under  the  ISDA  contracts  standard.  Of  those  derivatives  that  are  not  written  under  the 
ISDA  standard,  20%  are  under  the  FBF  contract  standard  and  23%  under  a  variety  of 
other  contract  standards.  Moreover,  it  can  be  seen  that  although  the  majority  of  the 
derivatives under the ISDA standard is those contracts written under English law (70%), 
the remaining derivatives contracts are written under NY law or other law:  

Table 11 – Break down of derivatives exposures 

Contract 
Standard 
FBF 

Governing 
Law 
French 

Quantity 

20% 

53 Why-FX-swap-lines-are-back, ftalphaville, 17 March 2020 

102 

 
 
 
 
 
 
                                                           
ISDA 
ISDA 
ISDA 
Others 

English 
NY Law 
Other 
- 

40% 
13% 
4% 
23% 

Source: based on DG FISMA interviews with banks 

Silent contracts would fall back to a term equivalent rate plus a fixed spread reflecting the credit 
risk of the banking sector. For NY law contracts, the US RFR working group (the ARRC) would 
recommend the applicable fall-back rate. Contracts that would pro-actively insert the ARRC 
recommended fall-back would enjoy a safe harbour (the choice could not be contested by one of 
the parties at a later stage). All contract parties remain at liberty to negotiate individual 
arrangements, also such not involving an ARCC recommended substitute. 

The NY statute is designed to minimize litigation by providing legal certainty for the issues that 
are likely to arise under New York law. Notably, the proposed statute would: (1) prohibit a party 
from refusing to perform its contractual obligations or declaring a breach of contract as a result of 
the discontinuance of LIBOR or the use of the statute’s recommended benchmark replacement; 
(2)  definitively  establish  that  the  recommended  benchmark  replacement  is  a  commercially 
reasonable substitute for and a commercially substantial equivalent to LIBOR; and (3) provide a 
safe  harbour  from  litigation  for  the  use  of  the  recommended  benchmark  replacement.  The 
proposed  legislation  would  achieve  these  goals  by  requiring  the  use  of  the  recommended 
benchmark replacement where the contract language is silent or the fall-back provisions prescribe 
the  use  of  LIBOR.  Where  the  fall-back  provisions  are  discretionary,  the  proposed  legislation’s 
safe harbour is intended to encourage the selection of the recommended benchmark replacement. 
The  proposed  legislation,  however,  would  not  impact  legacy  contracts  that  have  fall-back 
provisions  to  a  non-LIBOR  replacement  rate  (such  as  the  prime  rate).  The  proposed  statute  is 
based, in part, on New York legislation enacted in 1998 in anticipation of the discontinuance of 
sovereign currencies that were being replaced by the euro. 

3.1.5 Legal considerations 

Characteristics 

Fall-backs & Considerations 

• 
• 
• 

Derivatives 

Significantly commoditised 
Standardised documentation  
Protocols provide well-
established mechanism for large 
scale contract amendment 
ISDA engagement 

• 
•  More sophisticated counterparties 

•  Reference bank or dealer poll - voluntary 
•  Could be perceived as LIBOR submission, 

• 

unlikely 
to be given 
Incompatible with LIBOR discontinuation; 
do not contemplate permanent cessation 
Protocols not compulsory (legacy impact) 
but negotiation will be with two parties 
•  CCPs may add ISDA fall-backs to rulebooks 

• 

•  Considerable variation in terms 

•  Loans 

Loans & 
Bonds 

and documentation 

•  No mechanism equivalent to 

ISDA protocol, not 
an option as terms not 
standardised 
Product by product amendments 
challenging 

• 

•  Market practice on significant 

issues generally well-defined but 
not uniform 

103 

•  Lenders’ cost of funds - voluntary 
•  May be multiple parties (e.g. syndicate) 
•  LMA May 2018 recommendation to 
lower consent threshold helpful 

•  Earlier loans probably require full 

consent 

•  Bonds 

•  Reference rate from banks - voluntary 
•  Defaults to most recent rate – fixed 
•  May be commercially unacceptable to 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
• 
• 

• 

ICMA and LMA engagement 
Identity of some ultimate 
beneficial owners 
unlikely to be known 
Some counterparties may be less 
sophisticated 

issuer and investor 
•  Requirements for consent may be 

amplified by consumer protection 
laws 

•  Trustee discretion to amend unlikely 
•  High consent thresholds 

Source: based on DG FISMA interviews with banks 

3.2 Summary of costs and benefits 

I. Overview of Benefits (total for all provisions) – Preferred Option 

Description 

Continuity for SME 
financing 

Avoided litigation cost 

Mandating the 
publication of a time-
limited legacy rate   

Amount 

Direct benefits 

Comments 

to 

as 

for 

certainty 

beneficial 
and 

Legal 
the 
applicable financing rate would be 
SME 
highly 
continued 
financing 
the 
financing, 
availability  of  such 
especially 
current 
circumstances  when  the  COVID 
19 crisis is putting at risk the very 
survival of many SMEs.   

in 

beneficiaries 

system  as  an 

of 
The  main 
litigation  cost-savings  will  be  the 
benchmark users (and the national 
court 
indirect 
beneficiary, 
see  below).  The 
continuity option implies a de iure 
switch  to  the  reformed  IBOR  rate 
for  tough  legacy  contracts,  which 
would  provide  legal  certainty  for 
contracts. 
parties 
Therefore,  this  approach  would 
avoid  litigation  costs  that  would 
otherwise  arise  in  a  number  of 
cases  due  to  the  legal  uncertainty 
about  the  contract  reference  rate 
following  the  discontinuation  of 
the rate in the baseline scenario.  

those 

to 

In  the  European  Union,  SMEs  are  an 
important  group  of  corporate  borrowers 
and  their  loan  payments  are  often  based 
on  LIBOR  plus  a  spread  reflecting  their 
own  credit  rating.  It  is  fair  to  say  that 
LIBOR  plays  a  crucial  role  in  SME 
financing, also for debt issued by SMEs. 
Many  of  the  financing  instruments  used 
by  SMEs are  “priced” off a  LIBOR rate 
(either three, six or one year  LIBOR). A 
universally  agreed  legacy  rate  would 
therefore  give  legal  certainty  for  SME 
contracts that are still in course at the end 
of December 2021.   

to 

tough 

relating 

 It  is  very  difficult  to  give  an  accurate 
quantitative  assessment  of 
the  cost 
savings  resulting  from  avoiding  legal 
disputes 
legacy 
contracts for the no agreed fall-back rate 
scenario  (baseline).  However,  we  could 
make  a  very  rough  “ballpark”  estimate 
based on the number of legacy contracts 
pending in 2021 and the cost of litigation 
if  these  contracts  risk  being  considered 
void  due  to  the  absence  of  a  mutually 
accepted  fall-back  rate.  Conversations 
with  major  EU  corporate  lenders  reveal 
that  the  “big  five”  banks  have  in  excess 
of 1000 contractual counterparts, roughly 
600  of  them  corporations.    But  each  of 
these counterparts  has,  naturally, several 
loans 
related 
transactions  pending  after  December 
2021,  a  conservative  estimate  would  be 
that  LIBOR  loans  and  debt,  end  2021, 
will 
than  50.000 
contracts  per  lending  institution.  Should 
the  parties  wish  to  renegotiate/litigate 
this entire legacy stock on account of the 
absence  of  a  LIBOR  replacement,  costs 
would  reach  millions  per  institution  and 
probably  in  excess  of  1  billion  for  the 
EU banking sector.  

comprise  more 

LIBOR 

other 

or 

104 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
It  is  estimated  that  legal  and 
contract  remediation  for  IBOR 
transition  may  cost  more  than 
USD 50 million and would require 
contract 
enterprise-wide 
term 
discovery, 
client 
extraction, 
communication 
outreach 
capabilities[Source: 
Ernst  & 
Young analysis]. 

digitization, 
repapering, 

and 

Avoided renegotiation 
cost 

IBOR 

is  more 

challenging 

the  absence  of  any  action, 

the 
In 
repapering  of  contracts 
(consensual) 
is 
to  a  disappearing 
linked 
considered  as  a  huge  burden 
for 
European  banks.  According  to  estimates 
conducted by the private sector, a Global 
Systemically  Important  Bank  (GSIB) 
may  have  more  than  250,000  contracts 
with  references  to  IBORs  that  are  likely 
to  mature  post-2021,  in  addition  to 
several  thousand  other  contracts  with 
indirect  IBOR  exposure  (e.g.,  a  penalty 
in  supplier  agreements).  The 
clause 
volume  of  documents  can 
increase 
significantly  when  considering  activities 
such  as  servicing,  where  firms  may  not 
have  direct  financial  exposure  but  play 
an  important  operational  role  in  IBOR 
contracts.  
According  to  FISMA  Services  informal 
contacts, in terms of cost and complexity 
of  renegotiation  of  USD  LIBOR  legacy 
contracts,  the  cash  market  (loans  and 
than 
debt) 
derivatives  (where  agreements  are  often 
covered by standardised contracts  which 
can be amended via accepted protocols – 
like the ISDA’s ones).  
In  the  cash  markets,  counterparties  have 
varying  degrees  of  sophistication  and 
individual  negotiations  are  required  for 
each  agreement.  According 
the 
estimates  received,  there  are  thousands 
of  contracts  that  banks’  would  need  to 
renegotiate  (because  they  mature  after 
the  end  of  2021).  The 
legal  cost 
associated  with  renegotiating  “tough 
legacy”  contracts  is  expected  to  vary, 
driven by the following key variables: (i) 
Complexity, (ii) client sophistication and 
(iii)  lawyer  time  required.  According  to 
estimates  by  a  major  corporate  lender, 
loan  agreements  with 
renegotiating 
relatively  more 
terms 
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 
significantly, 
could 
possibly  exceeding  EUR  100,000  per 
transaction. Cost also increases if parties 
engage in extended negotiations, because 
lender 
lack  of  borrower  or 
of  a 
cooperation 

standardized 

see  costs 

rise 

to 

Smooth transition away 
from an IBOR rate 
ensures international 

In  order  to  demonstrate  the  indirect 
benefits  in  ensuring  a  smooth  IBOR 
transition,  the  following  extracts  from 

The  indirect  benefit  of  an  agreed 
legacy  rate  for  LIBOR  have  been 
the  ARRC  as 
described  by 

Indirect benefits 

105 

 
 
competitiveness, 
notably with the United 
States 

Contractual robustness 
leads to business 
continuity 

Exemption of third 
country foreign 
exchange spot rates 

Avoid increase of cost 
or limited offer of 
hedging contracts for 
EU investors 

this 

problem, 

follows:  “Although 
the  notes 
could theoretically be amended to 
they 
resolve 
typically  require  consent  from 
each  holder  to  change  the  interest 
rate.  So while it  may be possible 
to obtain consent in isolated cases, 
it  is  unlikely  to  be  workable  for 
many  securities  with  a 
large 
number  of  holders,  especially  if 
investors.  The 
held  by 
administrative 
and 
burden 
potentially  high  costs  of  reaching 
these investors will be significant, 
particularly  when 
unanimous 
consent  of  security  holders  would 
be required”. 

retail 

costly 

to  perform 

to  minimize 

the  ARRC  proposal  to  adopt  a  statutory 
fall-back  rate  for  USD  LIBOR54 
is 
illustrative:  “The  proposed  statute  is 
designed 
and 
disruptive  litigation  by  providing  legal 
certainty  for  the  issues  that  are  likely  to 
arise under New  York law.  Notably, the 
proposed  statute  would:  (1)  prohibit  a 
party  from  refusing 
its 
contractual  obligations  or  declaring  a 
breach  of  contract  as  a  result  of  the  
discontinuance  of    LIBOR  or  the  use  of 
the  statute’s    recommended    benchmark 
replacement;    (2)    definitively  establish 
  benchmark 
that 
commercially 
replacement 
reasonable 
a 
and 
for 
commercially  substantial    equivalent  to 
LIBOR;  and  (3)  provide    a  safe  harbour 
the 
from 
recommended  benchmark  replacement.  
The  proposed  legislation  would  achieve 
these  goals  by  requiring  the  use  of  the 
recommended  benchmark  replacement 
where  the  contract  language  is  silent  or 
the fall-back provisions prescribe the use 
of LIBOR”. 

a 
substitute 

recommended 

litigation  for 

the  use  of 

the 

is 

Not  overloading  the  EU  Member 
State’s  court  system  with  LIBOR 
related  litigation  is  an  important 
aspect  of  the  proposed  reform, 
notably  in  current  circumstances 
where  physical  courtroom  based 
litigation is a scarce resource, due 
to the COVID 19 pandemic.  

The  benefits  of  business  continuity  are 
not only evident or businesses and banks 
that  have  loan  or  debt  arrangements 
referencing  LIBOR  at  the  end  of  2021, 
contractual  robustness  is  also  in  the 
public  interest.  The  ARRC  proposal 
indirect  benefits  as 
these 
described 
follows: 
legislation 
“The  proposed 
would  [instead]  uniformly  implement  a 
fall-back  to  the  statute’s  recommended 
benchmark  replacement  for  securities. 
This  outcome  would  avoid  the  use  of  a 
rate  (last  quoted  LIBOR)  that  is  no 
longer  representative  of  a  market  rate, 
reduce uncertainty about the replacement  
rate,  and  minimize  market  disruption,  
potential    disputes    and    the    costs    and  
burdens    of    litigation  on  New  York 
commercial 
courts, 
participants.” 

residents 

and 

Direct benefits 

rate 

The possibility for EU banks to continue 
reference  FX 
listed 
spot 
derivatives  will  maintain  the  current 
level  of  transparency  on  those  contracts 
and  avoid  an  increase  of  their  costs  for 
EU investors due to diminished offer. 

in 

54 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Proposed-Legislative-
Solution.pdf 

106 

 
 
 
 
 
 
 
 
                                                           
It  will  also  avoid  that  investors  have  to 
seek  their  usual  financial  counterparty 
for hedging their business risk. 

Indirect benefits 

EU Banks do not lose a 
business sector ensures 
international 
competitiveness of EU 
banks in this FX 
hedging 

If  European  banks  are  allowed 
to 
continue  the  business  of  hedging  from 
currency  risk  they  will  not  lose  their 
market 
maintain 
competitiveness  vis-à-vis  third  country 
financial sectors players. 

stake 

and 

(1) Estimates are relative to the baseline for the preferred option as a whole (i.e. the impact of individual actions/obligations 
of  the  preferred  option  are  aggregated  together);  (2)  Please  indicate  which  stakeholder  group  is  the  main  recipient  of  the 
benefit in the comment section;(3) For reductions in regulatory costs, please describe details as to how the saving arises (e.g. 
reductions in compliance costs, administrative costs, regulatory charges, enforcement costs, etc.; see section 6 of the attached 
guidance). 

II. Overview of costs – Preferred option 

Citizens/Consumers  

Businesses 

Administrations 

One-off 

Recurrent 

One-off 

Recurrent 

One-off 

Recurrent 

There are no 
direct costs 
for citizens 
and 
consumers 

There are no 
recurrent 
costs for 
citizens and 
consumers 

Direct costs 

Mandating 
the 
publication 
of a time-
limited 
legacy rate   

Indirect costs  There are no 
indirect costs 

There are no 
indirect costs 

Banks will cease 
submissions to the 
old LIBOR and 
will, in 
consequence save 
the cost of 
submitting 
transaction data or 
exercising expert 
judgment as to their 
wholesale funding 
cost 

There is no 
recurrent cost for 
business 
benefiting from a 
formula-based 
legacy rate, 
published by the 
administrator of 
the old LIBOR 
rate 

Banks will save 
indirect costs of 
having to employ 
staff that prepare 
and verify the daily 
rate submissions 

Personnel that 
was previously 
engaged in 
administering the 
daily LIBOR 
submissions will 
need to be 
redeployed 
elsewhere in the 
bank, this could 
result in a small 
cost of 
redeployment 

The legacy rate 
is sourced from 
a central bank 
publication (the 
risk free rare) 
with a fixed 
spread added; 
this is a simple 
formula 
implying 
essentially no 
extra cost to the 
original LIBOR 
administrator 

The cost of daily 
publications of a 
formula-based 
legacy rate will 
be lower than 
assembling a 
panel bank rate 
each day 

Publication of 
the LIBOR 
successor rate 
is based on a 
formula, hence 
cheaper to 
produce than 
the “old” 
LIBOR 

The recurrent 
cost of 
publishing a 
formula-based 
replacement 
rate is expected 
to cease after a 
period of 5 
years, when the 
majority of the 
legacy stock 
has matured  

Exemption of 
third country 
foreign 
exchange 
spot rates   

Direct costs 

There are no 
costs for 
citizens and 
consumers  

There are no 
recurrent 
costs for 
citizens and 
consumers. 

Businesses and 
their banks will 
have no extra cost 
when the foreign 
exchange spot rates 
remain available 

An exemption 
does not cause 
recurrent cost, as 
it avoids the cost 
of any 
alternatives, such 

Third country 
administrators of 
spot rates do this 
in pursuit of a 
public mandate.  
The fact that 

As in the 
previous 
column, usage 
of third country 
spot rates in 
EU-based 

107 

 
 
 
 
 
 
 
 
 
 
for use in hedging 
contracts 

as contract 
authorisations or 
rate 
endorsements 

Indirect costs  There are no 
indirect costs 
for citizens 
and 
consumers 

Same as previous 
column 

There are no 
indirect cost for 
business, only the 
benefit to be able to 
hedge volatility of 
foreign exchange 
spot rates 

hedging 
contracts has no 
incidence on 
the cost that 
these 
administrators 
incur. The rates 
are not 
licensed, so 
there is no 
benefit either.  

Same as 
previous 
column 

these rates are 
used in EU-
based hedging 
contracts neither 
causes nor 
reduces their 
cost base.  

Usage of foreign 
exchange spot 
rates in EU 
based hedging 
contracts has no 
incidence on the 
cost of 
producing the 
spot rates 

(1) Estimates to be provided with respect to the baseline; (2) costs are provided for each identifiable action/obligation of the 
preferred option otherwise for all retained options when no preferred option is specified; (3) If relevant and available, please 
present information on costs according to the standard typology of costs (compliance costs, regulatory charges, hassle costs, 
administrative costs, enforcement costs, indirect costs; see section 6 of the attached guidance). 

108 

 
 
 
 
ANNEX 4: BACKGROUND INFORMATION 

The following sections provide further background information to the elements stated in 
the impact assessment.  

4.1. Overnight nearly risk-free rates 

As mentioned in section 1.1, the recent global trend to develop nearly risk-free overnight rates as 
alternatives for existing IBORs. The table below sets out the identified alternative risk free rates 
for five LIBOR currency areas. 

Table 12 – Overview of identified alternative RFRs in the five LIBOR currency areas 

Alternative rate 

Administrator 

Data source 

United States 
(USD) 

SOFR (Secured 
overnight 
financing rate) 

Federal 
Reserve, Bank 
of New York 

Triparty repo, 
FICC GCF, 
FICC bilateral 

U.K.(GBP) 

Euro area 
(EUR) 
€STR 
(Euro 
short-term 
rate) 
Bank of England  ECB 

SONIA (Sterling 
overnight index 
average) 

Switzerland 
(CHF) 

Japan (yen) 

SARON (Swiss 
average overnight 
rate) 

TONA (Tokyo 
overnight 
average rate) 

SIX Swiss 
Exchange 

Bank of Japan 

Form SMMD 
(BoE data 
collection) 

MMSR 

CHF interbank 
repo 

Money market 
brokers 

of 
Inclusion 
Wholesale  non-bank 
counterparties 

Secured rate 

Yes 

Yes 

Yes 

No 

Yes 

No 

No 

Yes 

Yes 

No 

FICC = Fixed Income Clearing  Corporation; GCF = general collateral financing; MMSR = money  market statistical 
reporting; SMMD = sterling money market data collection reporting 
Source: BIS, March 2019 

4.2 

Exposures to the main critical benchmarks: LIBOR and EURIBOR 

Error!  Reference  source  not  found.  summarises  the  notional  outstanding  for  the  two 
main IBOR rates, LIBOR and EURIBOR, indicating the most relevant currency rates. 

109 

 
 
Figure 6 – Notional IBOR exposures by currency (in EUR trillion) 

180

160

140

120

100

80

60

40

20

0

USD LIBOR

GP LIBOR

JPY LIBOR

CHF LIBOR

EUR LIBOR

EURIBOR

Source: Oliver Wyman analysis (2018), data as available as of December 2017 
Note:  The solid bar is the lower estimate, the lined bar is the upper estimate. Asset classes with more than 
EUR  1  trillion  in  both  USD  LIBOR  and  EURIBOR  are:  syndicated  loans,  Interest  rate  swaps  (OTC), 
forward  rate  agreements  (OTC),  Interest  rate  options  (OTC),  Cross-currency  swaps  (OTC),  Interest  rate 
options and futures (Exchange traded). See table 25 for further details. 

Table 13 – Notional IBOR exposures by currency and asset class (in EUR) 

Notional volume 

Currency  

Asset classes 

LIBOR  USD,  GBP,  JPY  and  CHF  reference 
rates USD > 215 trillion 
USD 
LIBOR 
157-166 
trillion 

CHF 
LIBOR 
4,5 trillion 

GBP 
LIBOR 
27 trillion 

JPY LIBOR 
27 trillion 

EUR  reference  rates 
USD > 130 trillion 
EUR-
LIBOR 
1,8 trillion 

EURIBOR 
121-130 
trillion 

Syndicated loans 
Corporate loans 
Other business loans 
Commercial mortgages 
Retail mortgages 
Credit cards 
Auto loans 
Consumer loans 
Student loans 
Floating rate notes 
RMBS 
CMBS/ABS/CLO 
Interest rate swaps (OTC) 
Forward 
rate 
(OTC) 
Interest rate options (OTC) 
Cross-currency swaps (OTC) 
Interest 
options 
rate 
(Exchange traded) 
Interest 
rate 
(Exchange traded) 
Deposits 
Source: Oliver Wyman analysis, data as available as of December 2017 
Note:  High (dark): more than 1 trillion, Medium (grey): 100 billion to 1  trillion, Low (white): less than 
100 billion 

agreements 

futures 

110 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3 

LIBOR 

As mentioned in section 2.1, LIBOR is the discount rate most widely used to value future cash 
flows and investment portfolios. Below are further details regarding LIBOR and figure 8 gives a 
breakdown of data sources used in the determination of USD LIBOR. 

LIBOR  was  authorised  for  use  in  the  Union  by  the  UK  Financial  Conduct  Authority  (FCA) 
which is the national competent authority for the supervision of ICE Benchmark Administration 
(IBA) which is located in London. 

IBA currently publishes LIBOR in five currencies (USD, GBP, EUR, YEN and CHF) in London.  
In  order  to  assemble  the  daily  LIBOR  rates,  IBA  has  constituted  a  designated  panel  of  global 
banks  for  each  currency  and  tenor  pair.  For  example,  16  major  banks,  including  Bank  of 
America, Barclays, Citibank, Deutsche Bank, JPMorgan Chase, and UBS constitute the panel for 
USD LIBOR. Only those banks that have a significant role in the London market are considered 
eligible for membership on the LIBOR panel, and the selection process is held annually. 

As of 1986, the British Bankers' Association (BBA) collected interbank offered rate quotes from 
a panel of banks. These rates reflected the rates at which banks claimed they could borrow funds 
from  other  banks.  For  example,  USD  LIBOR  reflects  the  rates  on  interbank  USD  loans  in 
London.  It  is  published  for  the  above  five  currencies  and  serves  seven  different  maturities—
overnight/spot next, one week, and one, two, three, six, and 12 months. 

The combination of five currencies and seven maturities leads to a total of 35 different LIBOR 
rates  calculated  and  reported  each  business  day.  The  most  commonly  quoted  rate  is  the  three-
month U.S. dollar rate, usually referred to as the current LIBOR rate. 

Every day,  major global banks communicate to IBA how much they would charge other banks 
for short-term loans.  IBA  takes out the highest and lowest figures, then calculates the average 
from  the  remaining  numbers.  This  is  known  as  the  trimmed  average.  This  rate  is  posted  each 
morning  as  the  daily  rate.  Once  the  rates  for  each  maturity  and  currency  are  calculated  and 
finalized, IBA publishes these rates once a day at around 11:55 am London time. 

As  of  April  2018,  IBA  submitted  a  new  proposal  to  strengthen  the  LIBOR  calculation 
methodology.  Further  to  such  reform,  a  standardized,  transaction-based,  data-driven,  layered 
method called the Waterfall Methodology is used for determining LIBOR. 

One  of  the  two  main  factors  driving  the  international  interbank  benchmark  reforms  is  the 
considerably reduced volumes of interbank unsecured term borrowing and structural changes in 
the money market landscape. This phenomenon has put a question mark on IBOR’s ability to 
reflect the cost of interbank financing. Interbank market activity is thus unlikely to recover much, 
even if central banks decide to reabsorb such excess liquidity (Kim et al (2018)) 55. One driver is 
the  abundant  supply  of  reserve  balances  created  as  a  result  of  central  banks’  unconventional 
policies (e.g. Bech and Monnet (2016)). Post-crisis, banks have also repriced the risks associated 
with  unsecured  interbank  lending,  reflecting  higher  balance  sheet  costs  due  to  tighter  risk 
management  and  implementation  of  the  new  regulatory  standards  (BIS  (2018))  (most  notably 
through the liquidity standards).  

55 Andreas Schrimpf and Vladyslav Sushko, BIS Quarterly Review, 05 March 2019. 

111 

 
 
                                                           
A scarcity of activity in interbank borrowing signals that a particular index might no longer be 
representative of the underlying (interbank) market. In accordance with the BMR, such an index 
would  no  longer  be  eligible  for  use  in  financial  instruments  or  contracts  issued  by  regulated 
entities within the Union. According to the Schrimpf and Sushko (March 2019) very few actual 
transactions underpin the submissions for the longer LIBOR tenors.  

Figure 7 – Breakdown of data sources used in the determination of USD LIBOR 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

ON/SW

1W

1M

2M

3M

6M

12M

Source: theICE, IBA 
Note: Level 1 (solid): The LIBOR submission is equal to the volume weighted average price of eligible transactions in 
unsecured  deposits,  primary  issuances  of  commercial  paper  and  certificates  of  deposit,  with  a  higher  weighting  for 
transactions  booked  closer  to  11:00  a.m.  London  time.  Level  2  (checkered):  Where  a  Contributor  Bank  has 
insufficient eligible transactions to make a Level 1 submission, the LIBOR submission is based on transaction-derived 
data, including time-weighted historical eligible transactions adjusted for market movements and linear interpolation. 
Level 3 (lined): Where a Contributor Bank has insufficient eligible transactions or transaction-derived data to make a 
Level 1 or Level 2 submission, the LIBOR submission is the rate at which it considers it could fund itself at 11:00 a.m. 
London time with reference to the unsecured wholesale funding market.  

4.4 EURIBOR 

As  mentioned  in  section  2.1,  EURBOR  is  primarily  a  European  corporate  loan  and  retail 
mortgage markets reference. More than one trillion euro in retail mortgages reference EURIBOR, 
mostly in the Spanish, Italian and Finnish retail markets. Below are further details on EURIBOR. 

EMMI  received  an  authorisation  to  publish  EURIBOR  in  accordance  with  the  EU  Benchmark 
Regulation  in  July  2019.  Due  to  its  location  in  Brussels,  EURIBOR  is  currently  within  the 
regulatory  purview  of  the  Belgian  markets  supervisor  (the  Financial  Services  and  Markets 
Authority, FSMA). As of January 2022, ESMA will become the supervisor of EURIBOR.  

EURIBOR  relies  on  contributions  made  by  panel  banks;  currently  18  panel  banks  contribute 
transactions, interpolation or rates based on expert judgement to the administrator of EURIBOR.  
In  2012,  the  EURIBOR  panel  comprised  46  banks,  so  the  gradual  decline  of  contributors  is  a 
cause of concern.  

EURIBOR plays an important role in the euro corporate loan and short-term commercial paper 
markets  (12  trillion  euro). Around  110  trillion  euro in  derivatives  contracts,  essentially  interest 
rate  swaps,  reference  EURIBOR.  According  to  ECB  data  presented  at  the  RFR  WG,  there  are 
outstanding derivative contracts referencing EURIBOR for a notional value of around EUR 109 

112 

 
 
  
 
trillion. EURIBOR is also reference in debt securities with a notional value of around EUR 1.6 
trillion. EURIBOR is used in loans for around EUR 10 trillion.56. Exposures in these segments 
are, of course, much shorter in term than retail mortgages. Due to the significance of its use in the 
Union, in 2016 the European Commission designated EURIBOR as critical benchmark. 

In the case of EURIBOR, European banks often attribute the gradual erosion of panel banks to 
the  regulatory  liability  for  the  accuracy  of  contributions,  especially  those  based  on  expert 
judgement. In this context, panel banks deplore an element of “free riding”57 by banks that do not 
contribute data to EURIBOR but reference this rate in their contracts and derivatives (see Figure 
8).  

Figure 8 – Transaction volume (monthly) underpinning the determination of EURIBOR for different tenors 
(January 2020) 

s
n
o

i
l
l
i

B
R
U
E

100
90
80
70
60
50
40
30
20
10
0

Volume

1W

90,7

1M

13,5

3M

5,9

6M

7,1

12M

12,3

Source: EMMI EURIBOR Transparency Indicators (January 2020) 
Note:  Level  1  and  Level  2.2  aggregate  monthly  notional  volumes  of  transactions  used  in  the  determination  of 
EURIBOR for different tenors (January 2020). For Level 2.2, only the portion of the overall volume of the transaction 
that is attributed to a particular tenor is considered. Level 1 consists of contributions based solely on transactions in the 
underlying interest at the defined tenor from the prior TARGET day, using a formulaic approach provided by EMMI. 
Level 2.2 is based on qualifying non-standard maturity transactions, where the maturity date falls between two defined 
tenors. The transactions may be used to determine a contribution at the two nearest defined tenors. 

4.5 The FCA Cessation plan 

Section  3.1.1  notes  that  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.  Below  you’ll  find  further  details  of  the  FCA 
Cessation plan. 

The FCA, the national competent authority for LIBOR, has set out a cessation plan for LIBOR 
that is applicable all five LIBOR currencies. The success of this cessation plan crucially depends 
on  the  fall-back  provisions  that  derivatives  market  participants  will  have  integrated  in  their 
agreements (via a standardised ISDA protocol). 

56 Molitor, Philippe, ECB, 2018, Update on quantitative mapping exercise. 
57 In order to tackle the “free riding” issue EMMI, the benchmark’s administrator, launched several efforts 
aiming to increase the contributor base for EURIBOR and further review its underlying methodology. The 
EURIBOR panellists and EMMI will shortly launch another initiative aimed at increasing the number of 
EURIBOR panel banks, aiming to make the rate more representative of the cost of euro-denominated 
wholesale financing of European banks.  

113 

 
 
 
 
                                                           
 
 
The  ISDA  fall-back  provisions could  be activated  either  by  means  of the announcement  of the 
permanent cessation of the benchmark – by the competent authority or by its administrator – or 
by  the  FCA  activating  a  “pre-cessation”  trigger  by  declaring  the  benchmark  no  longer  to  be 
representative of its underlying market. Three events are likely to affect the continued publication 
of LIBOR in all five currencies, including the crucial USD LIBOR rate.  

On or around 2021, the FCA is expected to adopt a public statement that, in its view, LIBOR, in 
any of the five currencies it covers, is no longer representative of the underlying interbank market 
(the  “pre-cessation  trigger”).    Although  the  activation  of  the  pre-cessation  trigger  does  not 
automatically imply the cessation of the benchmark, (1) the statement of non-representativeness 
would be irreversible, and (2) the grace period during which the benchmark is allowed to survive 
afterwards would be very short (e.g., 3 months). 

The FCA statement of non-representativeness would be irreversible, reflecting the FCA view that 
LIBOR  cannot  be  reformed  after  end-2021.    The  FCA  consider  LIBOR  a  structurally  flawed 
benchmark  that  does  not  reflect the funding  cost of a  well-capitalised  bank.  In  the  view  of the 
FCA,  LIBOR  cannot,  be  made  representative  again.  The  FCA  will  therefore  not  activate  the 
powers in Article 11(4) or Article 23(6)(d) of the BMR.  CCPs have indicated that they would not 
continue  to  clear  LIBOR  derivatives  after  the  point  the  FCA  determines  LIBOR  to  be  “non-
representative”. 

In  the  event  the  pre-cessation  trigger  is  activated  on  or  around  December  2021,  market 
participant  expect  that  a  “cash”  instrument  portfolio  of  between  USD  8-12  trillion  in  legacy 
contracts cannot be renegotiated in time to incorporate a contractual “fall-back” rate to cater to 
the cessation of LIBOR.   

To anticipate the permanent cessation, a private-sector GBP RFR working group was established. 
This working group is engaged in setting cut-off dates as of which contract parties in the UK will 
no longer issue new financial instruments or sign contracts referencing GBP LIBOR (the “no new 
flow” principle). For example, the group has already undertaken that U.K. domiciled banks will 
grant  no  new  GBP  LIBOR  loans  after  Q3/2020,  although  this  undertaking  may  now  slip  on 
account of the coronavirus crisis. The FCA and Bank of England strongly advocate more private 
sector  “no  new  flow”  undertakings  to  cover  a  range  of  GBP  derivatives  markets  in  the  near 
future.  For USD LIBOR, US banks, assembled in the ARRC, are preparing similar private sector 
“no new flow” commitments.   

In  parallel,  the  FSB  OSSG  has  mandated  ISDA  to  consult  on  a  protocol  on  the  contractual 
insertion of a pre-cessation trigger, in legacy derivative contracts, whereby contractual fall-back 
provisions  in  derivative  contracts  would  activate  as  soon  as  the  FCA  deems  LIBOR  no  longer 
representative.  The  ISDA  protocol  on  a  fall  back  rate  in  case  the  regulator  pulled  the  “pre-
cessation  trigger”  would  apply  to  all  currencies  so  various  quorums  on  participation  and 
majorities have to be met.  If not, the pre cessation trigger can be an opt-in among parties that 
agree on it. Most importantly, the ISDA fall back rates will be based on term adjusted risk free 
rates.  They’ll have no credit component.  

Tough legacy contracts are characterised as contracts (1) not covered by the ISDA pre-cessation 
triggers, (2) maturing after 2021, and (3) for which consent for insertion of a fall-back rate cannot 
be  obtained  prior  to  2021.  IBA  estimates  that  the  European  stock  of  tough  legacy  contracts  in 
cash markets is around 9 trillion USD maturing in 2025/26 with around 1 trillion maturing after 

114 

 
 
that  date.  The  FSB  has  issued  a  questionnaire  to  assess  residual  LIBOR  exposures  in  all  five 
remaining currencies.   

The current EU Benchmark Regulation (BMR) is designed to safeguard the continued publication 
of  critical  benchmarks,  such  as  IBOR  rates.  It  does  not  contain  any  powers  to  achieve  various 
mitigation  measures  once  a  critical  IBOR,  such  as  USD  LIBOR,  ceases  to  be  published  (for 
further detail, see Section 5.1).  

4.6 

Non-deliverable forwards (NDF) 

As stated in section 2.2, below is a definition of a non-deliverable forward (NDF). 

A NDF is a bilateral contract between a corporate and a bank that allows local currency hedging. 
Like  any  other  derivative,  an  NDF  trades  as  a  “forward  rate”.  The  crucial  feature  of  a  NDF  is 
that, at maturity, the profit (or loss) is calculated by comparing the forward rate to a fixing rate, 
which is the spot exchange rate at the date of maturity. The profit (loss) of a NDF is therefore 
dependent  on  the  relevant  currency’s  published  spot  rate,  as  published  by  the  organisation 
administering this rate. 

FX  spot  rates  are  therefore  one  element  in  calculating  the  profit  or  loss  of  a  NDF  currency 
hedge.  NDF currency hedges, in turn, are relevant for European corporates that have to manage 
cash flows denominated in emerging market’s (volatile) currencies. Other stakeholders exposed 
to volatility in emerging markets FX spot rates are companies that undertake capital investments 
abroad,  hedge  funds  or  mutual  funds  that  manage  foreign  investment  assets  and  banks  that 
manage foreign cash and liquidity flow for their clients.  

4.7 

References 

-  Adasoro, Inaki, Torsten Ehlers and Egemen Eren, BIS working papers No 708, 

May 2019, Global banks, dollar funding, and regulation; 

-  Bank for International Settlements (BIS), 2018, 88th Annual Report, Chapter III, 

June. 

-  BIS , 2019, Triennial Central Bank Survey of Foreign Exchange and Over-the-

counter (OTC) Derivatives Markets in 2019, 
https://www.bis.org/statistics/rpfx19.htm 

-  Bech, Morten and Cyril Monnet, 2016, A search-based model of interbank money 
market  and  monetary  policy  implementation,  Journal  of  Economic  Theory,  vol 
164, pp 32–67; 

-  Bloomberg, Jan 2020, LIBOR’s end is $12 trillion headache for loan bankers, 

https://www.bloomberg.com/professional/blog/libors-end-is-12-trillion-headache-
for-loan-bankers-quicktake/; 

-  EMMI, 2020, Euribor transparency indicators reports, https://www.emmi-

benchmarks.eu/euribor-org/transparency-indicators.html; 

-  FCA, 27 July 2017, Speech by Andrew Bailey, Chief Executive of the FCA, at 

Bloomberg London, ‘The future of LIBOR’, 
https://www.fca.org.uk/news/speeches/the-future-of-libor; 

115 

 
 
-  FCA, 25 March 2020, statement, Impact of the coronavirus on firms’ LIBOR 
transition plans https://www.fca.org.uk/news/statements/impact-coronavirus-
firms-libor-transition-plans; 

-  FSB, 2014, Reforming Major Interest Rate Benchmarks, https://www.fsb.org/wp-

content/uploads/r_140722.pdf; 

- 

ICMA, 2020,  Benchmark reform and transition to risk-free rates archive, 
https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/benchmark-
reform/benchmark-reform-and-transition-to-risk-free-rates-archive/; 

-  Kim,  Kyungmin,  Antoine  Martin  and  Ed  Nosal,  2018,  Can  the  US  interbank 
market be revived?, Board of Governors of the Federal Reserve System, Finance 
and Economics Discussion Series, no 2018–88. 

-  Molitor, Philippe, ECB, 2018, Update on quantitative mapping exercise ; 

-  Oliver Wyman analysis,  July 2018, Making the  world’s most important  number 

less important; 

-  Risk.net, 7 Feb 2020, Secrets and Libor fallbacks; 

-  Risk.net, 12 May 2020,Markit plans SOFR credit spread add-on using CDS data; 

-  Schrimpf, Andreas and Vladyslav Sushko, BIS Quarterly Review, 05 March 

2019, Beyond LIBOR: a primer on the new reference rates; 

-  TheICE, 2020, U.S. Dollar ICE Bank Yield Index Test Rates, 
https://www.theice.com/iba/Bank-Yield-Index-Test-Rates; 

-  TheICE, 2020, ICE LIBOR weekly reports, 

https://www.theice.com/publicdocs/ICE_LIBOR_Weekly_Report_-
_24_Feb_2020_-_28_Feb_2020.pdf; 

116 

 
 
 
 
ANNEX 5: CONFIDENTIAL ANNEX 

The  examples  below  can  only  indicate  estimated  orders  of  magnitude  in  terms  of 
percentage exposures and number of contracts that EU banks would need to renegotiate, 
but as work in the non-financial sector has only begun, these numbers may not reflect the 
depth of the legacy contract problem.  

Table 14 – EU banks’ USD LIBOR exposure across four asset classes 

Asset class 

Size 

Maturity 

Loans and advances 

Corporate deposits 

Debt  (issuances  and 
assets)  

Loans  and  advances  are  by  far  the  most 
affected asset class, both in terms of contract 
number  and  notional  exposure  amounts. 
When it comes to loans and advances, most 
major  European  banks  currently  have 
between  7000  and  20.000  pending  loan 
agreements  with  various  corporate  clients 
that  reference  USD  LIBOR  across  all 
maturity ranges. In terms of money lent, the 
individual  loan  portfolios  of  a  major  EU 
bank  can  amount  to  anything  between  USD 
25  billion  (mid-tier  institution)  to  in  excess 
of 50 billion USD (large institution).    

Most  major  European  banks  maintain 
corporate  deposit  accounts  for  their  clients.  
A major bank has anything between 4500 to 
almost  10.000  corporate  deposit  accounts 
exposed  to  USD  LIBOR.  In  terms  of  value, 
USD  denominated  corporate  deposits  vary 
between  USD  15  and  20  billion  for  each 
bank.  

All  major  EU  corporate  lenders  are  both 
issuers  of  USD  LIBOR  debt  and  holders  of 
USD LIBOR corporate debt on the asset side 
of  their  balance  sheets.    Major  EU  banks 
have  between  400  to  1000  debt  instruments 
on  their  respective  balance  sheets.    The 
average  value  of  debt  instruments  varies 
between USD 10 for a smaller institution to 
over 50 billion for the larger ones.  

USD  LIBOR  loans  still 
pending at the expected 
LIBOR  cessation  date 
(December 
2021) 
amount  to  between  50 
and 60% of outstanding 
loans and advances.   

50% 

of 
Around 
corporate  deposits  are 
based  on  agreements 
that 
beyond 
December 2021.  

expire 

Around  50%  to  75% of 
instruments  will 
debt 
not 
reach  maturity 
before  December  2021. 
The 
longer  maturity 
ranges  can  be  both  on 
the  liabilities  and  the 
asset  side  of  the  banks’ 
balance sheets. Some of 
term 
the 
longest 
maturities 
are 
concentrated in the debt 
issued  by 
the  banks, 
these  longer-term  debt 
issuances  are  crucial  in 
ensuring 
terms 
access 
long-term 
USD financing.  

of 
to 

Derivatives 

A major EU bank often has between 10.000 
and 80.000 USD LIBOR derivative contracts 

Between 45 and 50% of 
contracts 
derivatives 

117 

 
 
 
in  its  portfolio  at  any  given  point  in  time. 
Notional  exposures  of 
these  portfolios 
amount to several trillion USD.  

mature 
beyond 
December  2021.  25% 
of  current  derivatives 
contracts  will  mature 
beyond 2025.  

Source: Based on confidential data from FISMA interviews with large and mid-sized EU banks 

The  cost  of  renegotiating  a  USD  LIBOR  legacy  portfolio,  for  a  mid-tier  (lower  range) 
and a large European bank (upper range) can be extrapolated as follows 

Table 15 – Per bank cost of renegotiating the USD LIBOR portfolio (figures indicate lower and 
upper ranges) for the EU banking sector 
Loan 
agreements 
7000-
20.000 

Debt 
instruments 
400-1000 

Number of contracts to be renegotiated 

Derivative 
portfolio 
10.000-80.000 x 
0.4 to reflect 
that 60% of 
derivatives are 
potentially 
covered by the 
58
ISDA protocol
c) 220 million-
1.76 billion 

cost 

for 
Added 
complex loans/debt  
At least 50% of loan 
(3500-10.000) and 
debt (200-500) 
agreements require 
more complex 
negotiation 

d) 157–450 million 
(loans) 
f) 9–22 million 
(debt) 

Cost (in €)  

a) 385 
million-1.1 
billion 

b) 22-55 
million 

Total cost for loan and debt agreements  

Total cost for loan, debt and derivatives  
Total  cost  for  loan,  debt  and  derivatives 
(incl. complex loans and debt) 
Source: Based on confidential data from FISMA interviews with large and mid-sized EU banks 

407 million-1.15 billion =  
a) + b) 
627 million – 3 billion = a) + b) + c) 
793 million-3.47 billion = a) + b) + c) + d) + f) 

The above assumptions remain conservative as they do not include the renegotiation for 
corporate deposits, for which no precise data on cost per contract could be obtained. 

Table 16 – Per bank cost of renegotiating the USD LIBOR portfolio (figures indicate lower and 
upper ranges) for EU small business borrowers 

Number of contracts to be renegotiated 

Loan 
agreements 
7000 

Debt 
instruments 
400 

Derivative 
portfolio 
10.000 x 0.4 

Cost (in €)  

a) 385 x 0.2 
= 77 million 

b) 22 x 0.2 = 
4.4 million 

c) 220 x 0.2 = 44 
million 

cost 

Added 
for 
complex loans/debt 
At least 50% of loan 
(3500) and debt 
200) agreements  
d) 157 x 0.2 = 31.4 
million (loans) 
f) 9 x 0.2 = 1.8 
million (debt) 

Total cost for loan and debt agreements  

Total cost for loan, debt and derivatives  
Total  cost  for  loan,  debt  and  derivatives 
(incl. complex loans and debt) 

81.4 million =  
a) + b) 
125.4 million = a) + b) + c) 
158.6 million  = a) + b) + c) + d) + f) 

58  For ISDA legacy rates (covering approximately 60% of derivatives exposures) preparation appears 
advanced enough such that a contractual approach might avoid the need to legislate on an orderly IBOR 
phase-out scenario (see annex 3.1.4 for more details). 

118 

 
 
 
 
 
 
 
 
 
 
 
 
                                                           
119