The European Central Bank Working Group has published recommendations for ‘Fallback Provisions’ in Contracts for Cash Products and Derivative Transactions referencing the Euro Interbank Offered Rate.
The recommendations define new and improved ‘Fallback Provisions’, seeking to reduce uncertainty in the event of disruption to the ‘EURIBOR’ Benchmark; robust ‘Fallback Provisions’ are also a requirement of the ‘EU’ Benchmarks Regulation (‘BMR’).
The Report includes high-level general recommendations for new Contracts:
- All new Contracts should include ‘Fallback Provisions’, in case of permanent and temporary cessation of the ‘EURIBOR’ Benchmark. The provisions should specify the date from which the ‘Fallback Rate’ will apply after a ‘Disruptive Trigger Event’.
- ‘Fallback Provisions’ should meet requirements of the ‘BMR’ and any future recommendations on specific ‘Fallback Provisions’ for different Asset Classes and Financial Product Types
- New Contracts should consider differences between the value of ‘EURIBOR’ andthe value of any ‘Fallback Benchmarks’; Parties should contemplate adjustment methodologies to resolve such differences
- Unless otherwise agreed by Parties, the ‘Fallback Rate’ should be the one formally recommended by either the ‘ECB’, European Securities and Markets Authority (‘ESMA’), the Financial Services and Markets Authority (‘FSMA’), the European Money Market Institute, or relevant National Competent Authority (‘NCA’)
- New Contracts should be flexible enough to facilitate the application of new ‘Fallback Provisions’, in response to new Regulatory Recommendations and the changing market consensus
The Report also provides recommendations for Legacy Contracts:
- Legacy Instruments/Contracts dating from 1 January 2018 onwards, fall within the scope of the ‘BMR’ and must be covered by ‘Robust Written Plans’, as per Article 28(2)
- Legacy Contracts without ‘EURIBOR Fallback Provisions’ should introduce such Provisions when the Contracts are next amended
‘EU’ Market Participants should ensure all new Contracts referencing ‘EURIBOR’, include the recommended ‘Fallback Provisions’, as required under the ‘BMR’. In addition, Parties involved in ‘EURIBOR’ Legacy Contracts should ensure they are covered by ‘Robust Written Plans’ and introduce ‘Fallback Provisions’ when those Contracts are next amended.
Firms should closely monitor further updates and developments in this area. Firms should be aware of any future EU decisions regarding the exact Benchmark Replacement Rate to be used in ‘Fallback Provisions’. As per the recommendations, Firms should be aware of any emerging Market Consensus around the ‘EURIBOR’ Replacement Benchmark.
Firms should therefore ensure that Legal, Risk and Compliance Functions review and input, with oversight from Change Management, Senior Management / Executive Teams, appraising Audit and Risk Committees and Board Members, as appropriate.
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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