We are a benchmark user and therefore must comply with several requirements, including the Benchmarks Regulation (BMR). As a result of recent developments, we are no longer issuing instruments based on benchmarks that are being phased out, such as LIBOR. We are also closely monitoring market developments related to the EONIA-€STR transition.
There have been many scandals involving benchmark manipulation in recent years. For example, financial institutions that control an index used to establish a benchmark were benefitting from the performance of that benchmark. In response to these scandals and due to the immense impact of benchmarks in the financial markets, in 2013 the G20 asked the Financial Stability Board (FSB) to fundamentally review major interest rate benchmarks and plans for reform. 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) improve the processes and controls around submissions; (iii) identify alternative near-risk-free rates (RFRs); and (iv) encourage derivative market participants to transition new contracts to an appropriate RFR, where suitable.
Against this background, EU regulators responded by adopting the Benchmarks Regulation* (the ‘BMR’) 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 a benchmark is and imposes requirements on benchmark administrators, contributors and users. As a benchmark user, we are obliged to refer to interest rate benchmarks published by authorised or registered benchmark administrators in the EU when issuing financial instruments and entering into loan agreements. We must also incorporate fallback language into our contracts to manage the temporary or permanent cessation of benchmarks, and reach out to our clients about potential changes to benchmarks and the impact this would have on existing contracts.
In the context of the BMR, there have been several developments recently regarding some of the interest rate benchmarks (such as EURIBOR, EONIA and LIBOR) that we use in our financial instruments and loan agreements. In brief:
- €STR: the European Central Bank (ECB) started publishing €STR from 2 October 2019 onwards. €STR is the alternative euro risk-free rate set to replace EONIA.
- EONIA: as the administrator of EONIA, the European Money Markets Institute (EMMI) announced that it would change how and when EONIA is published (i.e. from 2 October 2019 onwards, EONIA is fixed at €STR plus 8.5 bps and published on T+1 at 9:15 AM CET). EMMI further announced that it will stop publishing EONIA under the recalibrated methodology on 3 January 2022.
- Hybrid EURIBOR: EMMI has been authorised as the administrator of the new hybrid EURIBOR under the BMR, the implementation of which was completed on 28 November 2019. This means banks will be able to use it after in 2021. The new hybrid EURIBOR is calculated according to a ‘waterfall’ method with three layers: (1) real transactions, (2) interpolation, and (3) expert panel. Regulators are seeking clarification that EURIBOR (as well as EONIA) will remain the same index both before and after its methodology has been amended.
- LIBOR: the UK Financial Conduct Authority announced in 2017 that it would no longer compel or oblige panel banks to submit the data on which LIBOR is calculated after the end of 2021. In light of recent developments, a transition is taking place from USD LIBOR to SOFR and GBP LIBOR to SONIA.
Internal working group
We have established a working group dedicated to BMR-related developments, which has been analysing our affected agreements and instruments, and implementing appropriate, BMR-related measures. Moreover, in light of these developments, we have decided not to issue instruments based on benchmarks that are being phased out, such as LIBOR. We are also closely monitoring market developments related to the EONIA-€STR transition. As far as existing financial instruments and loan agreements are concerned, we are reaching out to our clients and counterparties to inform them about market developments, and we will amend the terms of these financial instruments and loan agreements as soon as there is more clarity.
If you have any questions about developments related to BMR, do not hesitate to get in touch with your regular NWB Bank contact.
More information about these developments is available on the following web page of the Dutch Banking Association (available both in English and Dutch): https://www.nvb.nl/themas/toezicht-financiële-markten/rentebenchmarks-wat-zijn-de-ontwikkelingen/
You may also refer to our Benchmarks Regulation Compliance Plan.