Benchmarks Regulation – what is it all about?
During the past years, there have been many scandals involving benchmark manipulation due to conflicting position of financial institutions that control an index used in establishing a benchmark being also the beneficiary of the performance of that benchmark. As response to these scandals and due to the immense impact of benchmarks in the financial markets, the G20 asked the Financial Stability Board (FSB) in 2013 to undertake a fundamental review of major interest rate benchmarks and plans to reform these.
The FSB published its recommendations on interest rate benchmarks in July 2014, which included measures to: (i) strengthen IBORs in particular by anchoring them to a greater number of transactions, where possible; (ii) improving the processes and controls around submissions; (iii) identifying alternative near-risk free rates (RFRs); and (iv) encouraging derivative market participants to transition new contracts to an appropriate RFR, where suitable.
Against this background, the EU regulators took action by adopting the Benchmarks Regulation (the “BMR”) aiming to ensure the accuracy and integrity of benchmarks. The BMR came into effect on 1 January 2018, with certain provisions subject to a phase-in period. BMR defines what is a benchmark and imposes obligations on the so-called benchmark administrators, contributors and users. As a benchmark user, NWB Bank is obliged to comply with several obligations including, for example, issuing financial instruments/entering into loan agreements referring to interest rate benchmarks published by authorized/registered benchmark administrators in the EU, adding fallback languages to its contracts to govern temporary or permanent cessation of benchmarks and reaching out to its clients about the potential changes to benchmarks and their impacts on existing contracts.
How may this impact you? What are we doing?
Currently, there are several developments around the BMR in-scope interest rate benchmarks (such as EURIBOR, EONIA and LIBOR) that we use in our financial instruments/loan agreements. In brief:
- €STR: European Central Bank (ECB) will start publishing €STR from October 2, 2019 onwards. €STR is the alternative euro risk free rate, which will be EONIA’s replacement moving forward.
- EONIA: European Money Markets Institute (EMMI), as the administrator of EONIA, announced that it will change the methodology and publishing time of EONIA (i.e., from 2 October 2019 onwards, EONIA will be fixed at €STR plus 8.5 bps and published on T+1 at 9:15 a.m. CET). EMMI further announced that it will discontinue publishing EONIA under the recalibrated methodology from 3 January 2022.
- Hybrid EURIBOR: EMMI recently received an authorisation under the BMR in connection with its new hybrid EURIBOR methodology, which will be implemented by the end of 2019, meaning that banks will be able to use it post-2021. The new hybrid EURIBOR is calculated according to a waterfall method of: (1) real transactions, (2) interpolation, and (3) expert panel. Clarification is sought from the regulators that EURIBOR (as well as EONIA) will remain the same index both before and after amendment to its methodology.
- LIBOR: UK Financial Conduct Authority announced in 2017 that it would no longer compel or oblige panel banks after the end of 2021 to submit the data on which LIBOR is calculated. As per the current developments, there is a transition from USD LIBOR to SOFR and GBP LIBOR to SONIA.
We have established a working group dedicated to BMR related developments, which has been scoping our impacted agreements/instruments and implementing our BMR related developments. Further, based on these developments, we have taken business decisions not to issue instruments based on certain discontinuing benchmarks (i.e., LIBOR) and closely following up the market developments around EONIA-€STR transition. For existing financial instruments/loan agreements, we have been and will be reaching out to our clients and counterparties further to inform them about the market developments and to make amendments to the terms of these financial instruments/loan agreements once there is more clarity.
Please reach out to us through your regular NWB Bank contact if you have any questions about the BMR related developments.
You may find more information about the developments on the webpage of the Dutch Banking Association (available both in English and Dutch): NVB ››
You may also refer to the following link for our Benchmarks Regulation Compliance Plan.