Financial stability: Statutory Replacement of LIBOR
On 24 July 2020, the European Commission proposed to amend the EU regulation on financial benchmarks.
This proposal seeks to ensure that when a widely-used benchmark is discontinued, it neither disrupts the economy nor undermines the financial stability of the EU.
The discontinuation of a widely used benchmark has now become a reality following the FCA's decision to cease to regulate LIBOR production by 2021 ending. The Benchmarks Regulation gives supervisory authorities the power to prevent the abrupt cessation of certain widely used benchmarks.
However, it does not deal with the discontinuation of a critical benchmark. In the case of LIBOR, banks are particularly exposed on their own borrowings, on corporate loans and on residential real estate loans. Therefore, the Commission is looking to make amendments to the Benchmarks Regulation, which will allow it to come up with a replacement index covering all benchmark items at a widely-used, albeit discontinued benchmark rate, such as LIBOR, whenever the need arises in order to avoid any disruption of EU financial markets.
In the meantime, market participants are encouraged to agree on a permanent replacement rate for all new contracts whenever possible.