Will recent developments mark the end of LIBOR and EURIBOR by January 2022?
Possibly, a major change for the benchmark roadmap has been discussed
during the first reading in parliament on 14 Jan 2019. Members of the
Committee on Economic and Monetary Affairs (ECON) voted almost
unanimously in favor to the amendment of article 51 “Transitional
provisions” of the Benchmark Regulation (BMR). It is likely that the
following paragraph will pass within the current legislation period:
„4a. An existing benchmark designated as critical by an
implementing act adopted by the Commission in accordance with Article 20
of this Regulation that does not meet the requirements to obtain
authorisation in accordance with Article 34 of this Regulation by 1
January 2020 may, if its discontinuation would affect financial
stability, be used until 31 December 2021.”
This Amendment will effectively extend the transitional phase for
LIBOR, EURIBOR and EONIA by two years and has some major implications
for the future benchmark landscape.
Short-term: reduction of operational risk in 2019
On 20 December 2018, the EU working group published a detailed
roadmap of transition from EONIA to ESTER. This roadmap contains
variables, many of which are still unknown as of today. The proposed
amendment would allow market participants to use the benchmarks as they
are published today even after 2019, taking some implementation pressure
from market participants in the short run with regards to the
ESTER-EONIA transition 2019.
If the working group’s roadmap fails to materialise and the amendment
passes, we would see harmonised transition schedules of the EU
benchmarks and the US SOFR (Paced Transition Plan).
Mid-term: increased implementation pressure on the market
Another implication lies in the shift of power caused by the
amendment in lights of article 34 BMR “authorisation and registration of
an administrator”. The administrator of a benchmark must apply to the
national competent authority (NCA) of the country where the
administrator is located; in the case of the EONIA/EURIBOR administrator
EMMI that would be Belgium (FSMA). While prior to the amendment the FCA
/ FSMA had no real option other than to approve Evolved-LIBOR and
Hybrid-EURIBOR (as no successor benchmark will be in place by year-end)
things are different now. The exceeded transition period gives those
NCAs a real option to genuinely assess any benchmark methodology
proposed by the administrators and the power to shape the future of
Europe’s benchmark indices. This scenario will potentially accelerate
the benchmark transition because it technically eliminates the option to
use any adjusted form of LIBOR or EURIBOR for new business from 2022
onwards.