Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) 2016/1011 as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation
Date: 2020-07-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: benchmarking, consumer protection, financial control, financial legislation, financial market, foreign exchange market, monetary relations, price index, third country

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   EUROPEAN COMMISSION  Brussels, 24.7.2020  COM(2020) 337 final 2020/0154 (COD)  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 (Text with EEA relevance) {SEC(2020) 284 final} - {SWD(2020) 142 final} - {SWD(2020) 143 final}  
 
 
EXPLANATORY MEMORANDUM 

1. 

1.1. 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

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,  the  “Benchmark 
Regulation”  (“BMR”).  Financial  benchmarks  are  indices  by  reference  to  which  the  amount 
payable  under  a  financial  instrument  or  a  financial  contract  or  the  value  of  a  financial 
instrument  is  determined.  By  setting  out  governance  and  data  quality  standards  for 
benchmarks  that  are  referenced  in  financial  contracts,  the  Benchmark  Regulation  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 Capital Markets Union (CMU). 

The BMR introduces an authorisation requirement for administrators of financial benchmarks 
as  well  as  requirements  for  contributors  of  input  data  used  to  calculate  the  financial 
benchmark. The BMR also regulates the use of financial benchmarks1. In particular, the BMR 
rules require EU supervised entities (such as banks, investment firms, insurance undertakings, 
UCITS2)  to  use  only  indices  whose  administrator  has  been  authorised.  Benchmarks 
administered  in  third  countries  can  only  be  used  in  the  EU  following  an  equivalence, 
recognition or endorsement procedure.  

The  Benchmark  Regulation  applies  since  January  20183.  However,  EU  market  participants 
can continue to use benchmarks administered in  a country outside the Union  - regardless of 
whether an equivalence decision is in place, the index has been recognised or endorsed for use 
in the Union4 – until the transitional regime expires at the end of December 2021. 

1.1.1.  The orderly cessation of financial benchmarks 

Due  to  concerns  about  whether  the  London  Interbank  Offered  Rate  (LIBOR)  adequately 
represents  an  underlying  market  or  economic  reality  reflective  of  interbank  borrowing,  the 
national competent authority for LIBOR (the UK Financial Conduct Authority or “FCA”) has 
announced  the  likely  cessation  of  LIBOR  after  the  end  of  2021.  The  FCA,  in  all  its  public 
statements,  has  been  clear  that,  where  a  benchmark  loses  representativeness  and  its 
representativeness  will  not  be  restored,  use  of  the  benchmark  by  supervised  entities  must 
cease.  Relying  on  a  very  small  number  of  panel  banks  such  that  LIBOR  was  no  longer 
representative of the underlying market  or economic reality that  LIBOR  sought to  measure, 
means  that  its  value  could  deviate  significantly  from  that  economic  reality,  as  well  as 
becoming more volatile. 

As  documented  in  the  Commission’s  impact  assessment,  many  financial  instruments  and 
contracts that reference LIBOR will not have reached maturity by the expected cessation date 
after the end of 2021. Many of these contracts involve debt issued by supervised entities, debt 
instruments held on the balance sheet by supervised entities, the loan portfolio of supervised 
entities and derivative contracts that these entities have concluded to hedge their positions. As 
mentioned above, supervised entities within the scope of the EU Benchmark Regulation may 
only use indices that are authorised as compliant with the BMR. 

The  disappearance  of  LIBOR  will  have  significant  economic  impacts  that  EU  supervised 
entities  could  not  have  anticipated  when  concluding  these  often  longer  maturity  contracts. 
Many  of  these  contracts,  especially  those  concluded  before  adoption  of  the  BMR  in  2016, 
often lack any contractual “fall-back” provisions that deal with the permanent discontinuation 

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of  the  LIBOR  rate.  Amending  the  terms  of  thousands  of  contracts  that  currently  contain 
references  to  LIBOR  will  not  always  be  possible  in  the  short  period  remaining  until  the 
expected end of the LIBOR at the end of 2021.  

Many currently existing debt, loan, deposit and many of the derivative contracts would, upon 
a permanent cessation of an interest rate benchmark, such as LIBOR, lack a contractual fall-
back rate that allows parties to continue to comply with their contractual obligations.  

If no remedies were envisaged, the discontinuation of a widely used interest rate benchmark 
will have negative consequences for EU supervised entities and their contractual counterparts 
from  whom  these  entities  either  borrow  or  to  whom  they  lend  funds.  All  counterparts  in 
contracts referencing such a benchmark that are still pending at the date of cessation will face 
legal uncertainty as to the validity and enforcement of their contractual obligations. The range 
of  contracts  that  will  be  affected  by  the  cessation  of  a  widely  used  interest  rate  benchmark 
includes:  (1)  debt  issuances  by  supervised  entities;  (2)  debt  held  on  the  balance  sheet  of 
supervised  entities;  (3)  loans;  (4)  deposits  and  (5)  derivative  contracts.  A  large  part  of  the 
financial  contracts  that  reference  widely  used  interest  rate  benchmarks  involve  supervised 
entities within the scope of the BMR. The legal uncertainty and potentially adverse economic 
impact  that may  result  from difficulties in  the ability to enforce contractual  obligations  will 
pose a risk for financial stability in the Union. 

To mitigate the risk of contract frustration and the ensuing risk to financial stability, central 
banks in various currency areas have set up working groups to recommend fall-back rates that 
would  apply  to  the  legacy  stock  of  contracts  that  reference  interest  rate  benchmarks  in 
cessation  and  that  could  not  be  renegotiated  by  the  date  of  the  permanent  cessation  of  this 
benchmark.  For  example,  the  Alternative  Reference  Rate  Committee  (ARRC)  in  the  United 
State  has  recommended  a  waterfall  that  includes  a  replacement  rate  calculation  based  on  a 
risk-free  overnight  rate  (SOFR)  plus  a  spread  adjustment  to  make  the  replacement  rate 
resemble, as  close  as possible, the economic properties of the discontinued benchmark. The 
aim of these replacement rates would therefore be to mimic, to the extent possible, what the 
contract parties intended to achieve by references to the benchmark in cessation.  

It is a deliberate policy choice underpinning all recommendations for a replacement rate  for 
legacy contracts that no new contracts (defined as contracts concluded after cessation of the 
benchmark) may reference the replacement rate. This is because the replacement rate is most 
likely a synthetic version of the benchmark in cessation and is meant to ease the transition to a 
new  rate.  For  example,  a  replacement  rate  for  USD  LIBOR  will  most  likely  be  calculated 
based on a risk-free overnight  rate in borrowing (SOFR) plus  a spread adjustment to reflect 
the historical spread between the risk-free overnight rate and the replaced LIBOR rate. While 
a synthetic version of a benchmark should be stable enough to accompany the wind-down of 
legacy  portfolios,  it  is  not  a  permanent  solution,  reflective  of  a  supervised  entity’s  forward 
looking financing cost. 

However,  even  once  these  replacement  rates  are  available,  it  will  be  difficult  to  amend  all 
existing legacy contracts given the scale of the LIBOR references and the short period of time 
before LIBOR is expected to be discontinued.  

A reform of the BMR is therefore the right tool to establish a statutory replacement rate that 
mitigates the adverse consequences for legal certainty and financial stability that might ensue 
if LIBOR, or any other benchmark whose cessation would result in significant disruption in 
the  functioning  of  financial  markets  in  the  Union,  was  discontinued  without  such  a 
replacement  rate  being  both  available  and  integrated  into  legacy  contracts  that  involve  a 
supervised entity within the scope of the BMR. 

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1.1.2. 

Spot foreign exchange rates 

While  spot  foreign  exchange  rates  play  a  crucial  role  for  the  international  economy,  for 
several currencies, the rates that are available are largely unregulated and are often reflective 
of  central  bank  monetary  policies.  In  some  countries,  central  banks  have  implemented 
controls  to  restrict  the  publication  of  spot  foreign  exchange  rates  outside  their  local 
jurisdiction. In addition to preventing publication of off-shore foreign exchange rates, certain 
countries have in place capital controls that limit the convertibility of their currencies.  

Since their currencies are not freely convertible, the availability of on-shore currency hedging 
tools,  such  as  currency  forwards,  swaps  or  options,  is  limited.  Demand  for  hedging  tools 
against currency volatility in these countries outstrips the shallow liquidity offered by the on-
shore  market.  In  consequence,  European  financial  institutions  have  developed  off-shore 
derivatives  markets  that,  due  to  the  convertibility  restrictions  in  place,  settle  into  the  base 
currency of the hedging entity, albeit by reference to the foreign exchange rate  published at 
the  moment  of  the  hedging  contract’s  expiry.  Therefore,  hedging  against  movements  in 
currencies  subject  to  such  convertibility  restrictions  is  done  with  off-shore  derivative 
contracts. These include financial instruments such as non-deliverable currency forwards and 
non-deliverable swaps.  

Where these forwards and swaps are offered by an EU supervised entity (a dealer bank)1 and 
traded on an EU trading venue or via an EU systematic internaliser, the spot currency rate that 
is used to determine the pay-out due under the forward or swap agreement constitutes a “use” 
of the spot exchange rate which brings the offer of forwards and swaps by a supervised entity 
within the scope of the BMR.  

At the end of the current transitional period set out in Article 51 of the BMR the reference to 
foreign  exchange  spot  rates  in  EU-traded  currency  forwards  or  swaps  will  no  longer  be 
allowed. This means that, at the beginning of 2022, EU supervised entities are at risk of losing 
access  to  many  public  policy  rates  administered  outside  the  EU,  including  spot  foreign 
exchange  rates  that  they  reference  in  derivative  contracts  that  they  offer  corporate 
counterparts to help them manage their day-to-day hedging of currency risk. 

The  urgency  of  the  issue  arises  as  almost  no  other  jurisdiction  apart  from  the  EU  regulates 
spot exchange rates. Due to the absence of regulation, currency spot rates could not, therefore, 
be the subject of an equivalence assessment under the BMR. Neither can they be recognised 
or  endorsed  for  use  in  the  Union  under  the  BMR,  as  both  of  these  mechanisms,  in  turn, 
require some form of regulation and oversight. In conclusion, foreign exchange spot rates are 
not  suitable  candidates  for  equivalence,  endorsement  or  recognition  by  the  end  of  the 
transition period.  

This  proposal,  therefore,  makes  targeted  modification  of  the  scope  of  the  BMR  in  order  to 
ensure that European companies retain access to hedging tools against volatility of currencies 
that are not freely convertible into their base currency, ensuring seamless continuation of their 
business activities abroad after the expiry of the transitional period at the end of 2021. 

1 

A supervised entity pursuant to the definition in Article 3(1)(17)(b) of the 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.  

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1.2. 

Consistency with existing policy provisions in the policy area 

The  European  Union’s  financial  services  policy  encourages  legal  certainty  and  financial 
stability.  This  policy  goal  extends  to  contracts  that  are  essential  for  the  financing  of  its 
banking sector. As part of the Capital Markets Union action plan, the Union strives to create 
legal framework that ensures stability for corporate loans, debt issuances by its banking sector 
and for securitizations.  

In light of the anticipated cessation of LIBOR after the end of 2021, supervised entities in the 
European Union will be faced with  legal  uncertainty  for hundreds of thousands of  financial 
contracts.  In  order  to  avoid  adverse  consequences  for  the  lending  capacity  of  the  European 
banking sector, early clarification as to the availability of a statutory replacement rate for use 
by supervised entities in all LIBOR referencing contracts that mature beyond the end of 2021 
is necessary. The planned amendments to the BMR are therefore a corollary to both the CMU 
and more recent initiatives aimed at spurring the recovery from economic repercussion of the 
Covid 19 pandemic. 

1.3. 

Consistency with other Union policies 

In  line  with  the  recommendations  of  the  Financial  Stability  Board,  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.  

This  proposal  introduces  various  tools  to  make  sure  that  the  phase  out  of  a  widely  used 
interbank rate does not unduly affect the banking sector’s capacity to provide funding to EU 
companies  and  therefore  jeopardize  a  key  objective  of  the  CMU.  Finally,  the  measures 
proposed are to  be viewed as supporting  “an EU economy that  works for people”, which is 
one  of  the  headline  ambitions  set  out  in  the  2020  Commission  Work  Programme.  Bank 
lending to retail customers is an important element of an economy that serves the needs of the 
people.  Retail  loans  reference  IBOR  rates,  whose  movement  determines  loan  repayment 
amounts, which is  a key consideration in managing personal finances for many citizens. By 
providing the tools for a legally sound transition from IBOR rates, this initiative benefits retail 
customers holding loans referencing those rates. 

2. 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

2.1. 

Legal basis 

The legal basis for the adoption of the Benchmark Regulation 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  powers  to  ensure  contract  continuity  in  the context of 
the  cessation  of  a  benchmark  with  systemic  relevance  in  the  Union  and  de-scoping  certain 
benchmarks should also fall under the same legal basis. 

In particular, Article 114 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 

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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  TFEU  gives  the  EU  the  right  to  act  to  (1) 
address  contract  continuity  issues  that  arise  in  the  context  of  the  very  likely  cessation  of  a 
benchmark  with  systemic  relevance  in  the  Union  in  the  near  future;  and  (2)  ensure  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,  the  lack  of  mechanisms  in  the  BMR  to  organise  the  orderly  cessation  of  a 
benchmark  with  systemic  relevance  in  the  Union  would  be  likely  to  result  in  heterogeneous 
implementing  or  legislative  solutions  by  Member  States.  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.  Therefore,  the  use  of  Article  114  TFEU 
appears  as  the  most  appropriate  legal  basis  to  tackle  these  problems  comprehensively  and 
uniformly and to avoid fragmentation.  

As  regards  the  continued  access  to  third-country  foreign  exchange  spot  rate  for  EU  users,  this 
action  is  aimed  to  avoid  harming  the  competitiveness  of  certain  EU  stakeholders  and  the 
effectiveness  of  the  financial  system,  for  the  Union  economy,  its  citizens  and  businesses,  that 
would otherwise occur should those rates remain subject to the BMR. This action is also aimed at 
avoiding  obstacles  to  the  single  market  which  could  be  caused  by  the  impediments  to  cross 
border exchanges due to impossibility to continue reference the third-country foreign exchange 
spot  rate.  Article  114  TFEU  is  therefore  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 continued reference of foreign currencies spot rates would fall under 
the competence of the EU according to Article 114 TFEU. 

2.2. 

Subsidiarity (for non-exclusive competence)  

According to the principle of subsidiarity (Article 5.3 of the TEU), action at EU level should 
be  taken  only  when  the  aims  envisaged  cannot  be  achieved  sufficiently  by  Member  States 
alone  and  can  therefore,  by  reason  of  the  scale  or  effects  of  the  proposed  action,  be  better 
achieved by the EU. While some benchmarks are national, the benchmark industry as a whole 
is international in both production and use. Issues concerning the use by supervised entities of 
benchmarks having systemic relevance in the Union  as well the use of non-EU benchmarks 
have by definition a European dimension. 

The  issues  that  this  legislative  proposal  aims  to  address  could  not  be  addressed  through 
individual  un-coordinated  action  by  Member  States.  As  to  the  issue  of  the  orderly  winding 
down of benchmarks whose cessation would result in significant disruption in the functioning 
of  financial  markets  in  the  Union,  Member  States  could  intervene  introducing  legislation 
indicating the national replacement rate in contracts referencing the benchmark in cessation. 
Nevertheless,  individual  action  by  Member  States  is  likely  to  address  only  partially  the 
identified  issues  (notably  because  some  Member  States  may  legislate,  while  others  would 
not).  Furthermore,  different  approaches  to  replacement  rates  for  legacy  contracts  across  the 
Member  States  would  introduce  fragmentation  in  the  single  market.  Action  at  EU  level  as 
regards a harmonised orderly transition regime for benchmarks with systemic relevance that 
works for legacy contracts entered into by supervised entities across the Union is thus needed 

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in  order  to  ensure  coherence  and  to  further  improve  the  functioning  of  the  single  market. 
More  specifically,  un-coordinated  action  at  national  level  in  relation  to  benchmarks  whose 
cessation would result in significant disruption in the functioning of financial markets in the 
Union  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  treat  benchmarks  in  cessation 
that are used in many cross-border debt, loan or derivatives transactions in the same manner 
and therefore make such transactions more complex to manage.  

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. 

2.3. 

Proportionality 

The  proposed  amendments  to  the  Benchmark  Regulation  are  proportionate,  as  required  by 
Article 5(4) of TEU. The proposal follows a proportionate approach making sure that limited 
new obligations are imposed on  supervised entities using systemic benchmarks who already 
are subject to requirements under the Benchmarks Regulation.  

Furthermore,  the  procedure  accompanying  the  wind-down  of  benchmarks  with  systemic 
relevance  aims  to  provide  visibility  and  legal  certainty  for  users  of  those  benchmarks  who 
might not be in a position to amend or renegotiate their stock legacy contracts. The financial 
sector  as  well  as  the  end  clients,  both  corporates  and  citizens,  should  therefore  benefit 
significantly from the improvements brought forward with this amending Regulation.  

2.4. 

Choice of the instrument 

An amendment to the Benchmark Regulation is the most appropriate legal instrument to solve 
issues  arising  from  the likely disappearance of  certain  IBORs widely used in  EU which  are 
themselves regulated under the Benchmark Regulation.  

The  use  of  a  Regulation,  which  is  directly  applicable  without  requiring  national  legislation, 
will  restrict  the  possibility  of  divergent  measures  being  taken  by  competent  authorities  at 
national level, and will ensure a consistent approach and greater legal certainty throughout the 
EU.  

3. 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

3.1. 

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 addressed in this regulation.  

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.  The  Commission  has  received  responses  from  22  respondents, 
mostly private companies and business associations. 

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

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(1) 

(2) 

(3) 

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. 

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 third panel provided for a cross-cutting view on whether the BMR scope as well 
as the third country provisions should be reassessed. 

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

the  private  sector, 

The  Commission  has  also  been  actively  involved  in  the  work  of  the  Euro  RFR  Working 
Group,  composed  of  stakeholders  from 
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 
Official  Sector  Steering  Group  of  the  Financial  Stability  Board,  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  benchmarks,  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.  

3.2. 

Collection and use of expertise 

The  proposal  builds  on  the  expertise  of  EU  competent  authorities  that  today  supervise 
administrators of critical benchmarks as well as on the expertise of administrators themselves. 
In  addition,  the  Commission  monitors  closely  developments  in  other  jurisdictions  that  are 
similarly  preparing  the  transition  to  IBOR  replacements,  in  particular  in  relation  to  the 
preparatory work taking place in the Official Sector Steering Group of the Financial Stability 
Board.  

Several  jurisdictions  have  also  established  private  sector  working  groups  to  accompany  the 
transition. The Commission has been informed of the various alternatives also considered by 
these groups and has taken a view on whether these alternatives could be applied to the EU 
situation. 

3.3. 

Impact assessment 

3.3.1.  Orderly cessation of a financial benchmark 

The  Commission  conducted  an  impact  assessment  on  how  to  best  accommodate  legacy 
contracts that contain references to a widely used interest rate benchmark in cessation and that 
cannot be renegotiated by the end of 2021 (“tough legacy” contracts). After receiving a first 
negative opinion on 15 May 2020, the impact assessment received a positive opinion by the 
Regulatory Scrutiny Board on 4 June 2020. 

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All  of  the  options  considered  in  the  impact  assessment  focused  on  the  creation  of  a 
replacement  rate  in  case  a  widely  used  interest  rate  benchmark  would  be  discontinued.  The 
replacement rate would either result from a conversion of the benchmark in cessation into a 
time-limited  replacement  rate  to  accompany  the  wind-down  of  legacy  contracts,  the 
authorisation  of  such  a  replacement  rate  by  the  regulator  competent  for  the  benchmark  in 
cessation, the publication of a replacement rate under a statutory exemption or the mandating 
of a permanent replacement for a benchmark in cessation;  

The approach chosen in the impact assessment was to amend the BMR to equip the national 
authority  competent  for  the  administrator  of  a  widely  used  interest  rate  benchmark  in 
cessation with the regulatory powers to manage the orderly wind-down of such a benchmark, 
when  it  is  no  longer  capable  of  reflecting  an  underlying  market  or  economic  reality.  These 
powers  would  comprise  the  power  to  require  an  administrator  of  such  a  benchmark  in 
cessation to change the methodology that underpins the benchmark in order to ensure that the 
benchmark  remains  sufficiently  robust  and  sustainable  to  accompany  the  wind-down  of 
legacy  contracts  that  reference  this  benchmark  at  the  point  in  time  that  the  competent 
regulator concludes that the capacity to measure an underlying market or economic reality is 
lost.  The  new  benchmark  “conversion  powers”  would  allow  the  competent  regulator  to 
require  a  methodology  change  as  long  as  this  was  necessary  to  protect  consumers  and 
financial stability in the Union.  

However since completion of the impact assessment, a series of more recent caveats made by 
the LIBOR regulator, the FCA, leaves doubt as to whether conversion powers are effective to 
cater to  all instances that  a conversion rate would need to  cover.  For  example, according to 
the FCA: “… regulatory action to change the LIBOR methodology may not be feasible in all 
circumstances, for example where the inputs necessary for an alternative methodology are not 
available in the relevant currency.”2 

There  are  several  effectiveness  issues  that  may  make  it  less  efficient  to  rely  on  conversion 
powers:  

First,  the  use  of  conversion  powers  might  not  be  possible  in  all  circumstances  or  for  all 
LIBOR  currencies.  For  example,  the  FCA  points  out  that  conversion  powers  could  not  be 
exercised where the “inputs” necessary for an alternative methodology are not available in the 
relevant currency3.  

Second, conversion may not always be feasible for legal or practical reasons. While the FCA 
cites  instances  where  the  administrator  may  not  have  access  to  robust  input  data  in  the 
relevant currency, access issues could include instances where the sourcing and licensing of 
these  inputs  might  appear  too  complex  or  costly  to  warrant  the  effort  of  producing  a 
replacement  rate4.  In  this  case  the  publication  of  the  benchmark  in  cessation  would  cease 
without any replacement rate.  

Third, even if feasible, conversion powers might lead to heterogeneous results. According to 
the  FCA,  some  markets  such  as  derivatives,  bond  and  large  parts  of  cash  markets  prefer 

2 
3 
4 

https://www.fca.org.uk/news/statements/fca-statement-planned-amendments-benchmarks-regulation 
https://www.fca.org.uk/markets/transition-libor/benchmarks-regulation-proposed-new-powers 
The  provision  of  a  conversion  rate  would  include  the  sourcing  new  input  data,  developing  a  new 
calculation methodology, and establishing surveillance procedures and publication tools. These changes 
all require technological and procedural development, and potentially sourcing and agreeing new data 
provision arrangements with third party providers other than the administrator of the conversion rate. 

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transition  to  overnight  interest  rates  compounded  in  arrears  at  the  end  of  a  relevant  interest 
period. In contrast, tough legacy consumer or export loan contracts using three, six or twelve 
month term LIBOR benchmarks use a forward-looking measure of interest rate expectations. 
Methodology changes  inherent  in  the exercise of conversion powers would  therefore not  be 
able to deliver results that are the preferred outcome for all current LIBOR users. As the FCA 
states,  industry-agreed  replacement  arrangements  would  therefore  be  preferable  as  they  are 
more likely to cover a broader range of contracts.  

Fourth, conversion powers rely on the fact that the administrator of a benchmark in cessation 
and the administrator of the benchmark that results from conversion is the same legal entity. 
Such  a  requirement  would  confine  the  risk-free  rate  working  groups  -  that  will  issue 
recommendations on the industry-agreed replacement rate - to recommend a replacement rate 
that is produced by the same administrator as that of the benchmark in cessation. Especially in 
cross-border  situations,  where  the  risk  free  rate  working  group  operates  in  a  different 
jurisdiction than that of the administrator of the benchmark in cessation (e.g., LIBOR for USD 
contracts),  this  is  not  necessarily  the  case.  In  addition,  such  a  requirement  would  put 
unnecessary constraints  on the  rate  that a  risk free rate working  group could  recommend  as 
the most suitable replacement benchmark.  

In light of the above, the chosen approach has been modified to ensure that the Commission 
would  have  the  necessary  legal  empowerments  to  ensure  that  a  replacement  rate  for  a 
benchmark  whose  cessation  would  result  in  significant  disruption  in  the  functioning  of 
financial  markets  in  the  Union,  could  be  designated  with  sufficient  flexibility  to  cover  all 
potential circumstances. 

The  conversion  powers  have  therefore  been  replaced  by  the  powers  for  the  European 
Commission to designate a statutory successor for a benchmark whose cessation would result 
in  significant  disruption in  the functioning of financial markets  in  the Union. The European 
Commission,  in  exercising  the  designation  powers  would  be  able  to  take  into  account 
industry-agreed  replacement  rates  that  are  likely  to  be  recommended  by  the  risk-free  rate 
working groups that have been convened by the central banks in several currency areas. The 
change of approach is warranted to ensure that a suitable industry-agreed replacement rate is 
available  for  use  in  all  contracts  entered  into  by  an  EU  supervised  entity.  This  replacement 
rate  should  be  available  for  all  legacy  contracts,  irrespective  of  potential  use  or  time 
restrictions  that  might  be  associated  with  the  exercise  of  a  conversion  rate  mandated  by  a 
regulator outside the Union.  

3.3.2.  Options for avoiding loss of EU-based risk management tools 

In order to maintain the possibility of hedging foreign exchange risk for both the EU financial 
and  non-financial  sectors,  the  impact  assessment  analysed  four  options,  each  of  which 
amounted  to  the  targeted  BMR  exemptions,  either  for  certain  spot  currency  exchange 
benchmarks or hedging instruments which rely on these benchmarks to calculate the pay-outs.  

One option – a general exemption for all third country benchmarks, except those designated 
as  critical  for  financial  stability  in  the  Union,  was  discarded  at  an  early  stage,  as  it  was 
considered  less  consistent  with  the  original  BMR  approach,  which  is  to  provide  for 
comprehensive  coverage  of  all  third  country  benchmarks,  the  “all-in”  approach  being  a 
specific policy goal at the time the BMR was negotiated. 

Out  of  the  three  remaining  options,  the  option  of  creating  a  statutory  exemption  for  third 
country  foreign  exchange  spot  rates  emerged  as  the  preferred  option.  This  approach  was 

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deemed the best to 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  ensure  maintaining  consistency  within  the  Benchmark  Regulation  and  not 
require regulators to  authorise individual forward contracts.  An exemption  for public policy 
rate is already embedded in the BMR philosophy, taking the form of an exemption for 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 for 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. 
Moreover,  this  options  was  more  future-proof  than  the  two  others.  This  option  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. 

3.4. 

Fundamental rights 

The  proposal  respects  the  fundamental  rights  and  observes  the  principles  recognised  by  the 
Charter of Fundamental Rights of the European Union, in particular the principle establishing 
a  high  level  of  consumer  protection  for  all  EU  citizens  (Article  38).  Without  an  orderly 
transition to IBOR replacement rates, retail clients would be potentially negatively affected by 
IBOR cessations, particularly in  certain  Member  states that rely more heavily on mortgages 
contracts with references to floating rates. 

4. 

BUDGETARY IMPLICATIONS 

The initiative does not have any impact on the EU budget.  

5. 

5.1. 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

The  Commission  proposes  to  establish  a  monitoring  programme  to  evaluate  whether  the 
proposed amendments deliver the intended results.  

5.1.1.  Monitoring with regard to the orderly IBOR transition 

This  legislative  proposal  requires  competent  authorities  of  supervised  entities  using  the 
replaced benchmark to monitor whether the replacement has minimised contract frustration or 
any other detrimental effects on economic growth and investments in the Union. They shall 
report to that effect to the Commission and to ESMA annually. 

5.1.2.  Monitoring with regard to the foreign exchange spot rate  

This  legislative  proposal  requires  competent  authorities  of  supervised  entities  that  use  third 
country  foreign  exchange  benchmarks  that  are  designated  by  the  Commission  as  excluded 
from  the  scope  of  the  BMR  to  report  to  the  Commission  and  to  ESMA  on  the  number  of 
derivative  contracts  that  use  that  foreign  exchange  benchmark  for  hedging  against  third 
country currency volatility at least every two years. 

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5.2. 

Detailed explanation of the specific provisions of the proposal 

5.2.1.  Orderly cessation of a financial benchmark 

The proposed amendments to the BMR are designed to reduce legal uncertainty and risks to 
financial stability. The approach introduces powers to designate a statutory replacement rate 
that  takes  the  place  of  all  references  to  a  benchmark  whose  cessation  would  result  in 
significant disruption in the functioning of financial markets in the Union. The replacement of 
all references to the “benchmark in cessation” with a statutory replacement rate is designed to 
avoid,  or  at  least  minimise,  costly  litigation  by  providing  legal  certainty  for  all  contracts 
involving an EU supervised entity.  In particular, the proposed statutory replacement powers 
would: (1) avoid that a party to a contract involving a supervised entity refuses to perform its 
contractual obligations or declares a breach of contract as a result of the discontinuance of a 
benchmark  whose  cessation  would  result  in  significant  disruption  in  the  functioning  of 
financial markets in the Union; (2) establish that a replacement rate for such a benchmark as 
recommended  by  a  risk-free  rate  working  group  established  under  the  auspices  of  a  central 
bank in the relevant currency area can serve as a statutory replacement for this benchmark and 
(3)  provide  a  safe  harbour  from  litigation  for  supervised  entities  that  use  (reference)  the 
statutory replacement rate.  

The  proposed  BMR  amendments  would  achieve  these  goals  by  empowering  the  European 
Commission to designate a statutory replacement rate that would replace the reference to the 
benchmark in cessation where: (1) the contract contains no fall-back provisions that cover the 
permanent cessation; (2) cessation of that benchmark would result in significant disruption in 
the  functioning  of  financial  markets  in  the  Union.  For  contracts  that  do  not  involve  a 
supervised entity within the scope of the BMR, the statutory replacement would not apply. In 
order  to  also  cover  these  contracts,  Member  States  are  encouraged  to  provide  for  statutory 
replacement  rates.  These  statutory  replacement  rates  would  apply  to  contracts  between  two 
non-financial  counterparts  governed  by  the  laws  of  their  jurisdiction.  At  the  appropriate 
moment, the European Commission intends to adopt a recommendation encouraging Member 
States  to  select  the  replacement  rate  chosen  for  EU  supervised  entities  as  the  statutory 
replacement rate in their national statutes.  

Since the main goal of these new powers is to ensure legal certainty for the existing contracts 
referencing  the  benchmark  whose  cessation  would  result  in  significant  disruption  in  the 
functioning of financial markets in the Union, it appears coherent that it will be incumbent on 
the  competent  authorities  of  the  supervised  entity  using  the  relevant  benchmark  to  monitor 
whether  statutory  replacement  rates  for  contracts  entered  into  by  supervised  entities  has 
resulted in reducing litigation or breach of such contracts and report their findings annually to 
the Commission. 

There  are  the  three  main  pillars  to  the  proposed  amendments  of  the  BMR  provisions 
governing the winding down of a benchmark with systemic relevance in the Union.  

First, the proposed BMR amendments will introduce a statutory power, whereby the European 
Commission designates a replacement rate if and when a benchmark whose cessation would 
result in significant disruption in the functioning of financial markets in the Union ceases to 
be published. This power can be exercised irrespective of where the benchmark is authorised 
and published. In designating the statutory replacement rate, the European Commission shall 
take into account the recommendations of the risk free rate working groups operating under 
the  auspices  of  the  central  banks  responsible  for  the  currency  in  which  the  rates  of  the 
benchmark in cessation are denominated.  

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Second, the statutory replacement rate will, by operation of the law, replace all references to 
the “benchmark in cessation” in all contracts entered into by an EU supervised entity. In order 
to  benefit  from  the  statutory  replacement  rate,  contracts  referencing  the  benchmark  in 
cessation must be pending at the time of the designation enters into force, while no contracts 
concluded after entry into force of the implementing act designating the replacement rate will 
be allowed to reference the statutory replacement rate.  

Third, for contracts not involving an EU supervised entity, Member State are encouraged to 
adopt national statutory replacement rates. At the appropriate time, the European Commission 
may issue a recommendation that the national statutory replacement rates will be identical to 
the  statutory  replacement  rate  that  is  designated  for  contracts  involving  EU  supervised 
entities.  

The following overview provides a description of key components of the proposed statutory 
replacement rate and its effects on contractual provisions:  

Mandatory  use  of  the 
 
statutory  replacement 
rate 

 

(1) Legacy contracts that contain no contractual fall-back benchmarks;  
(2) Legacy contracts that only contain fall-back provisions to accommodate for a 
temporary suspension of a benchmark whose cessation would result in significant 
disruption in the functioning of financial markets in the Union; 
(3) Legacy contracts that contain a fall-back that references the benchmarks 
mentioned under (2) (e.g., last quoted fixing of the above benchmarks). 

  Legacy contracts that provide parties with a choice of fall-back rates; 
  Legacy contracts that do not involve a supervised entity within the scope of the 

Optional  use  of 
the 
statutory  replacement 
rate (opt-in) 
Mutually  agreed  opt-
outs 
Trigger events 

 

 

 

Scope  of  the  statutory 
replacement rate  

Accompanying 
measures 

BMR. 
Parties that have renegotiated their references to a benchmark and selected another 
replacement rate. 
The  statutory  replacement  rate  would  become  applicable  or  available  upon  the 
occurrence of three trigger events:  
(1) a public statement by or on behalf of the administrator of a benchmark 
announcing that the administrator has ceased or will cease to provide the 
benchmark permanently;  
(2) a public statement by the regulatory authority competent for the authorisation of 
the administrator of the benchmark announcing that the administrator of a 
benchmark has ceased or will cease to provide the benchmark permanently; 
(3) a public statement by the regulatory authority competent for the authorisation of 
the administrator of the benchmark announcing that the benchmark is no longer 
representative of an underlying market or economic reality on a permanent and 
irremediable basis. 
All contracts referencing a benchmark  in cessation  that involve  an EU  supervised 
entity  as  a  counterpart.  Mutually  agreed  opt  out  remain  available,  also  for 
supervised entities 
The  European  Commission  proposes  to  issue  recommendations  inviting  Member 
States to complement the statutory replacement rate  for use by supervised entities 
with  national  statutes  mandating  the  use  of  the  EU  statutory  replacement  rate  for 
use in contracts between  non-financial counterparts that are governed by the laws 
of their jurisdiction.  

The statutory  replacement  rate would become applicable  upon the occurrence of  any one of 
three objective trigger events, as described in the table above.  

5.2.2.  Exemption of specific foreign exchange benchmarks 

The  proposed  amendments  aim  at  exempting  specified  third  country  spot  foreign  exchange 
benchmarks  from  the  scope  of  the  Regulation  where  they  fulfil  certain  criteria.  The  list  of 
exemptions  set  out  in  Article  2  of  the  BMR  would  be  extended  to  include  spot  foreign 

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exchange  benchmarks  designated  by  the  Commission  (new  paragraph  1(i)).  This  would  be 
accompanied by a provision specifying how the Commission may exercise its power and the 
criteria  for  exempting  qualifying  spot  foreign  exchange  benchmarks  from  the  scope  of  the 
BMR (new paragraphs 3 and 4 in article 2). In order for the spot foreign exchange benchmark 
to  qualify  for  exemption,  it  has  to:  (1)  measure  the  spot  exchange  rate  of  a  third-country 
currency  that  is  not  freely  convertible  and  (2)  be  used  by  EU  supervised  entities,  on  a 
frequent,  systematic  and  regular  basis  as  settlement  rate  to  calculate  the  pay-out  under  a 
currency  forward  or  swap  contract.  Furthermore,  to  enable  the  Commission  to  have  all  the 
necessary elements to designate exempted benchmarks, ESMA and the ECB are required to 
provide it with relevant information and views on specific exemption criteria.  

Finally,  in  order  to  monitor  the  appropriateness  of  the  newly  introduced  exemption, 
competent  authorities  and  supervised  entities  are  required  to  periodically  report  to  the 
Commission on the use of the exempted benchmarks by EU businesses and the changes of the 
balance  sheets  of  supervised  entities  in  terms  of  exposure  to  third  country  currency 
fluctuation.  

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2020/0154 (COD) 

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 

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 114 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Economic and Social Committee5, 

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1) 

In order to hedge against exposure to foreign exchange rate volatility in currencies that 
are  not  readily  convertible  or  subject  to  exchange  controls,  companies  in  the  Union 
enter  into  non-deliverable  currency  forwards  and  swaps.  Those  instruments  enable 
their  users  to  protect  against  volatility  of  foreign  currencies  that  are  not  readily 
convertible into a base currency, such as the dollar or the euro. The unavailability of 
foreign  currency  spot  exchange  rates  to  calculate  the  pay-outs  due  under  currency 
forwards  and  swaps  would  have  a  negative  effect  on  companies  in  the  Union  that 
export to emerging markets or hold assets in those markets, with consequent exposure 
to  fluctuations  of  emerging  market  currencies.  Following  the  expiration  of  the 
transitional  period  set  out  in  paragraphs  4a  and  4b  of  Article 51  of  Regulation  (EU) 
2016/1011  of  the  European  Parliament  and  of  the  Council6,  the  use  of  spot  foreign 
exchange rates provided by a third country administrator other than a central bank will 
no longer be possible. 

(2) 

In order to enable  companies in the Union to continue their business  activities while 
mitigating  foreign  exchange  risk,  spot  exchange  rates  referred  to  in  non-deliverable 
forwards or swaps to calculate contractual pay-outs should be excluded from the scope 
of Regulation (EU) 2016/1011. 

(3) 

In order to designate certain third country spot exchange rates as being excluded from 
the scope of Regulation (EU) 2016/1011, the power to adopt acts in accordance with 

5 
6 

OJ C , , p. . 
Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices 
used as benchmarks in financial instruments and financial  contracts or to measure the performance of 
investment  funds  and  amending  Directives  2008/48/EC  and  2014/17/EU  and  Regulation  (EU) 
No 596/2014 (OJ L 171, 29.6.2016, p. 1). 

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Article  290  of  the  Treaty  on  the  Functioning  of  the  European  Union  should  be 
delegated to the Commission in respect of the exemption of foreign spot exchange rate 
for non-convertible currencies when that the spot exchange rate is used for calculating 
the  pay-outs  that  arise  under  non-deliverable  currency  forwards  or  swaps.  It  is  of 
particular importance that the Commission carry out appropriate consultations during 
its  preparatory  work,  including  at  expert  level,  and  that  those  consultations  be 
conducted  in  accordance  with  the  principles  laid  down  in  the  Interinstitutional 
Agreement  of  13  April  2016  on  Better  Law-Making.  In  particular,  to  ensure  equal 
participation  in  the  preparation  of  delegated  acts,  the  European  Parliament  and  the 
Council receive all documents at the same time as Member States' experts, and their 
experts systematically have access to meetings of Commission expert groups dealing 
with the preparation of delegated acts. 

The UK Financial Conduct Authority (FCA) has announced it will stop supporting the 
production  of  one  of  the  most  important  interest  rate  benchmarks,  the  London 
Interbank Offered Rate (LIBOR) by  the end of  2021.  As of the end of the transition 
period  for  the  United  Kingdom’s  withdrawal  from  the  Union  on  31 December  2021, 
LIBOR will no longer qualify as  a critical benchmark. The cessation of LIBOR may 
nevertheless result in negative consequences that produce significant disruption in the 
functioning of financial markets in the Union. In the Union there is a stock of contracts 
in  the  areas  of  debt,  loans,  term  deposits  and  derivatives  that  reference  LIBOR,  that 
mature  beyond  31  December  2021  and  that  do  not  have  robust  contractual  fall-back 
provisions  to  cover  for  the  cessation  of  LIBOR.  Many  of  those  contracts  cannot  be 
renegotiated  to  incorporate  a  contractual  fall-back  prior  to  31  December  2021.  The 
cessation of LIBOR may therefore result in significant disruption in the functioning of 
financial markets in the Union. 

To be able to  provide for an orderly  wind down  of  contracts  that reference  a  widely 
used  benchmark  the  cessation  of  which  may  result  in  negative  consequences  that 
produce significant disruption in the functioning of financial markets in the Union and 
where such contracts cannot be renegotiated to include a contractual fall-back rate by 
the  time  of  that  benchmark’s  cessation,  a  framework  accompanying  the  cessation  of 
such benchmarks should be laid down. That framework should comprise a mechanism 
aimed  at 
replacement  benchmarks. 
Replacement  benchmarks  should  ensure  avoiding  contract  frustration  which  may 
result in negative consequences that produce significant disruption in the functioning 
of financial markets in the Union. 

transitioning  such  contracts 

to  suitable 

In  order  to  ensure  uniform  conditions  for  the  implementation  of  this  Regulation, 
implementing  powers  should  be  conferred  on  the  Commission  to  designate  a 
replacement  benchmark  to  be  used  for  the  winding  down  of  contracts  that  have  not 
been  renegotiated  by  the  date  the  benchmark  in  cessation  is  no  longer  published. 
Those powers should be exercised in  accordance with Regulation (EU) No 182/2011 
of  the  European  Parliament  and  of  the  Council7.  Legal  certainty  requires  that  the 
Commission exercises those implementing powers only upon precisely defined trigger 
events clearly demonstrating that administration and publication of the benchmark to 
be replaced will cease permanently. 

(4) 

(5) 

(6) 

7 

Regulation  (EU)  No  182/2011  of  the  European  Parliament  and  of  the  Council  of  16  February  2011 
laying down the rules and general principles concerning mechanisms for control by the Member States 
of the Commission's exercise of implementing powers (OJ L 55, 28.2.2011, p. 13). 

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(7)  Where  necessary,  the  Commission  should,  at  the  appropriate  moment,  adopt  a 
recommendation encouraging Member States to designate, by virtue of national laws, 
a replacement rate for the benchmark in cessation for contracts entered into by entities 
that  are  not  supervised  entities  subject  to  Regulation  (EU)  2016/1011.  In  order  to 
account  for  the  interconnectedness  of  contracts,  the  Commission  should  have  the 
possibility to recommend that the national replacement rates should be identical to the 
replacement rate it designates for contracts entered into by supervised entities. 

(8) 

(9) 

(10) 

The Commission should exercise its implementing powers only in situations where it 
assesses  that  the  cessation  of  a  benchmark  may  result  in  negative  consequences  that 
produce  significant  disruption  in  the  functioning  of  financial  markets  in  the  Union. 
The  Commission  should  also  exercise  its  implementing  powers  only  where  it  has 
become  clear  that  the  representativeness  of  the  benchmark  concerned  cannot  be 
restored or that the benchmark will no longer be published on a permanent basis.  

Use of that replacement benchmark should be allowed only for contracts that have not 
been renegotiated prior to the cessation date of the benchmark concerned. The use of 
the  replacement  benchmark  designated  by  the  Commission  should  therefore  be 
restricted to contracts already entered into by supervised entities at the moment of the 
entry  into  force  of  the  implementing  act  designating  the  replacement  benchmark. 
Furthermore,  considering  that  such  implementing  act  is  aimed  at  ensuring  contract 
continuity, the designation of the replacement  benchmark  should not  affect  contracts 
that already provide a suitable contractual fall back provision. 

In  exercising  its  implementing  powers  to  designate  a  replacement  benchmark,  the 
Commission  should  take  into  account  recommendations  by  private  sector  working 
groups operating under the auspices of the central bank responsible for the currency in 
which the interest rates of the replacement benchmark are denominated with regard to 
replacement rates to be used in existing financial instruments and contracts referencing 
the  benchmark  in  cessation.  Those  recommendations  should  be  based  on  extensive 
public  consultations  and  expert  knowledge,  and  reflect  benchmark  users’  agreement 
about  the  most  appropriate  replacement  rate  for  the  interest  rate  benchmark  in 
cessation. 

(11)  Since the main objective of those implementing powers is to ensure legal certainty for 
supervised  entities  with  existing  contracts  referencing  a  benchmark  in  cessation, 
competent authorities of a supervised entity using the benchmark in cessation should 
monitor the evolution of the legacy stock between counterparts to such contracts and 
report their findings  annually to the Commission and to  the European Securities and 
Markets Authority (‘ESMA’). 

(12)  Regulation (EU) 2016/1011 should therefore be amended accordingly. 

(13) 

In  view  of  the  fact  that  LIBOR  will  no  longer  be  a  critical  benchmark  within  the 
meaning of Regulation (EU) 2016/1011 as of 1 January 2021, it is appropriate that this 
Regulation enters into force without delay, 

HAVE ADOPTED THIS REGULATION: 

Article 1 

Amendments to Regulation (EU) 2016/1011 

(1) 

Article 2 is amended as follows: 

(a) 

in paragraph 2, the following point (i) is added: 

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a  foreign  exchange  benchmark  which  has  been  designated  by  the 

“(i) 
Commission in accordance with paragraph 3.”; 

(b) 

the following paragraphs 3 and 4 are added: 

“3. 
The Commission  can  designate  foreign  exchange  benchmarks  that  are 
administered  by  administrators  located  outside  the  Union  where  all  of  the 
following criteria are fulfilled: 

(a) 

(b) 

(c) 

4. 

the foreign exchange benchmark refers to a spot exchange rate of a third-
country currency that is not freely convertible; 

supervised  entities  use  the  foreign  exchange  benchmark  on  a  frequent, 
systematic  and  regular  basis  in  derivative  contracts  for  hedging  against 
third country currency volatility; 

the foreign exchange benchmark is used as a settlement rate to calculate 
the pay-out of the derivative contract referred to in point (b) in a currency 
other than the currency with limited convertibility referred to in point (a). 

The Commission shall adopt delegated acts in accordance with Article 49 
to create and update as appropriate a list of foreign exchange benchmarks 
that fulfil the criteria laid down in paragraph 3. Competent authorities of 
supervised  entities  that  use  third  country  foreign  exchange  benchmarks 
that  are  designated  by  the  Commission  in  accordance  with  paragraph 3 
shall report to the Commission and to ESMA on the number of derivative 
contracts  that  use  that  foreign  exchange  benchmark  for  hedging  against 
third country currency volatility at least every two years.”; 

(2) 

the following Article 23a is inserted: 

“Article 23a 
Mandatory replacement of a benchmark  

(1)  The  Commission  may  designate  a  replacement  benchmark  for  a  benchmark 
that  will  cease  to  be  published  where  the  cessation  of  that  publication  may 
result  in  significant  disruption  in  the  functioning  of  financial  markets  in  the 
Union and provided that any of the following events has occurred: 

(a) 

(b) 

the  competent  authority  for  the  administrator  of  that  benchmark  has 
issued  a  public  statement,  or  has  published  information,  in  which  it  is 
announced  that  the  capability  of  that  benchmark  to  measure  the 
underlying  market  or  economic  reality  cannot  be  restored  through  the 
exercise of any of the remedial powers referred to in Article 23; 

the  administrator  of  a  benchmark  has  issued  a  public  statement,  or  has 
published  information,  or  such  public  statement  has  been  made  or  such 
information has been published on behalf of that administrator, in which 
it is announced that that administrator has ceased or will cease to provide 
the benchmark, permanently or indefinitely, provided that, at the time of 
the issuance of the statement or the publication of the information, there 
is  no  successor  administrator  that  will  continue  to  provide  the 
benchmark; 

(c) 

the  competent  authority  for  the  administrator  of  a  benchmark  or  any 
entity  with  insolvency  or  resolution  authority  over  the  administrator  of 
that  benchmark  has  issued  a  public  statement  or  has  published 

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information in which it is stated that the administrator of that benchmark 
has  ceased  or  will  cease  to  provide  that  benchmark  permanently  or 
indefinitely, provided that, at the time of the issuance of the statement or 
the  publication  of  the  information,  there  is  no  successor  administrator 
that will continue to provide that benchmark. 

(2)  The replacement benchmark shall, by operation of law, replace all references to 
the  benchmark  that  has  ceased  to  be  published  in  financial  instruments, 
financial contracts and measurements of the performance of an investment fund 
where all of the following conditions are fulfilled: 

(a) 

those  financial  instruments,  contracts  and  performance  measurements 
reference the benchmark that has ceased to be published on the date the 
implementing  act  designating  the  replacement  benchmark  enters  into 
force; 

(b) 

those  financial  instruments,  contracts  or  performance  measurements 
contain no suitable fall back provisions. 

(3)  The  Commission  shall  adopt  implementing  acts  to  designate  a  replacement 
benchmark  in  accordance  with  the  examination  procedure  referred  to  in 
Article 50(2) where one of the conditions laid down in paragraph 1 is fulfilled. 
When  adopting  the  implementing  act  referred  to  in  paragraph  1,  the 
Commission shall take into  account,  where  available, the recommendation by 
an alternative reference rate working group operating under the auspices of the 
central  bank  responsible  for  the  currency  in  which  the  interest  rates  of  the 
replacement benchmark are denominated. 

(4)  Competent  authorities  of  supervised  entities  using  the  benchmark  designated 
by  the  Commission  shall  monitor  whether  the  implementing  acts  adopted  in 
accordance with paragraph 1 have minimised contract frustration or any other 
detrimental  effects  on  economic  growth  and  investments  in  the  Union.  They 
shall report to that effect to the Commission and to ESMA annually.” 

Article 2 

This  Regulation  shall  enter  into  force  on  the  day  following  that  of  its  publication  in  the 
Official Journal of the European Union. 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

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