Publication
Road to COP29: Our insights
The 28th Conference of the Parties on Climate Change (COP28) took place on November 30 - December 12 in Dubai.
Global | Publication | September 2020
On July 23, 2020 the European Central Bank (ECB) published its report on preparations for benchmark rate reforms (Report)1. The report is based on an assessment of banks’ preparedness for benchmark rate reforms, which was conducted by ECB Banking Supervision in the second half of 2019.
The Report states that banks had focused more on the transition from the euro overnight index average (EONIA) to the euro short-term rate (€STR) than on the reform of the euro interbank offered rate (EURIBOR) and the associated risks. This is probably due to the fact that EONIA will be discontinued on January 3, 2022 and replaced by the €STR, an overnight wholesale funding rate that is published by the ECB, while, on the other hand, EURIBOR underwent a methodological reform in 2019 and has been authorised by the competent authority, meaning that the benchmark can continue to be used for new and legacy contracts after January 3, 2022.
With regard to EURIBOR, the Report stresses that it is important for banks to be prepared for all scenarios, including the disappearance of this benchmark. The long-term sustainability of EURIBOR depends on factors such as the continued willingness of the panel of contributing banks to support it, and whether or not there is sufficient activity in its underlying market. So far, a different approach has been taken for the reform of EURIBOR than for LIBOR as the latter is being replaced by currency-specific overnight rates. Euro area banks operating in the global finance markets are aware of this reform and the different approach taken. The Working Group on Euro Risk-Free Rates (WG EUR RFR) is currently in the process of identifying potential €STR-based fallbacks for EURIBOR. It is expected that a proposal will be published for consultation in the coming months.
One of the best practices as identified by the ECB in its Report relates to fallback language – it is essential for banks to assess whether their existing contracts contain appropriate fallback language. Also, they will need to ensure that any new contracts entered into will contain such language.
We note that the use of fallback provisions in contracts was generally not required under EU law until January 2018, when the Benchmark Regulation came into effect. Before such time, fallback provisions were often originally intended to address the temporary unavailability of the relevant benchmark, instead of permanent cessation. The ECB recommends that banks check the fallback language contained in their existing contracts to assess whether those provisions appropriately deal with the scenario whereby EURIBOR is permanently discontinued.
For new contracts, the WG EUR RFR2 has recommended that new fallback provisions should include a permanent cessation trigger event. In a similar vein, the Working Group on Sterling Risk-Free Reference Rates has recently published a recommendation3 stating that after the end of Q3 2020, all new and re-financed LIBOR-referencing loan products should contain clear contractual arrangements to facilitate conversion ahead of end-2021, through pre-agreed conversion terms or an agreed process for renegotiation, to SONIA or other alternatives.
On 24 July 2020, the European Commission published4 proposed targeted amendments which seek to create a new framework to have a statutory replacement rate in place by the time certain benchmarks (including EURIBOR) are no longer in use. A statutory replacement rate is a rate that the Commission can designate by law. Such a rate would take the place of e.g. EURIBOR in all contracts and financial instruments that mature after 2021. The power of the Commission to designate a statutory successor for the relevant benchmarks would only apply to contracts concluded by supervised entities, such as banks and investment firms, as these contracts are governed by the BMR.
We note that the proposed solution is a one size fits all approach and therefore will be a compromise position which some parties may not wish to rely on as it could be more advantageous to agree a negotiated position which has a better outcome for the relevant transaction. For this reason and the fact that regulated firms cannot rely on the legislation being put in place in time, firms should in our view still prepare to amend contracts and remediate the contracts that they can.
A key feature of the Report is that it includes and sets out best practices that the ECB has identified through its assessment. These include, amongst others:
At Norton Rose Fulbright, we have significant experience of helping firms with their Interbank Offered Rate (IBOR) transition programmes.
We have designed an end-to-end solution using a methodology based on project management best practice, supported by technology, specialist legal experience and regulatory and compliance advice, delivered via our global network.
Our integrated transition team consists of banking, finance and regulatory lawyers, compliance professionals, legal technologists, legal process architects, project managers and innovation specialists.
The Norton Rose Fulbright solution, which is built and tailored to a specific client’s needs, focuses on:
We have extensive knowledge across our legal practice and also a dedicated risk consultancy which specialises in the practical implementation of change programmes across governance, risk and compliance. We have summarised below some of the key areas in which we can support clients in navigating the complex challenges in respect of IBOR transition.
As noted above, a clear and robust communications strategy across all relevant stakeholders is of critical importance for managing and mitigating risk in respect of IBOR transition. We can support firms across various aspects of the development and delivery of an IBOR transition communications strategy. This includes, but is not limited to:
Effective risk processes, underpinned by appropriate governance arrangements, are fundamental to informing the planning and successful delivery of an IBOR transition programme. IBOR transition programme plans should be “living” in that they need to consider risk across all key risk types (e.g. conduct, operational, legal, regulatory, reputational and financial) and how they are evolving on an ongoing basis to ensure that timely action and mitigation can be taken. We can support firms across various risk aspects including, but not limited to:
For further information and regular updates on IBOR transition, subscribe to the Norton Rose Fulbright Institute IBOR transition hub5.
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The 28th Conference of the Parties on Climate Change (COP28) took place on November 30 - December 12 in Dubai.
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While country risk cannot be avoided in cross-border transactions entirely, it can be effectively mitigated through careful transaction structuring and tailored contractual protections.
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Miranda Cole, Julien Haverals and Emma Clarke of our Brussels/ London offices are the authors of a chapter on procedural issues in merger control that has been published in the third edition of the Global Competition Review’s The Guide to Life Sciences. This covers a number of significant procedural developments that have affected merger review of life sciences transactions.
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