Our members support the general approach proposed by the European Commission to replace 3-month (3M) CHF LIBOR in the event of cessation with the 3M compounded SARON based on the ‘last reset’ methodology + 0,31 bps spread adjustment according to the ISDA methodology. However, in order to ensure a smooth process and provide for consistency and legal certainty, we would also like to highlight the below key messages.
- Cut-off date for application of the implementing act: the designated replacement rate should apply to all CHF LIBOR linked contracts, regardless when they were concluded. If this is not feasible, then we would at least deem appropriate as a cut-off date the cessation announcement of 5 March 2021 by the UK Financial Conduct Authority, marking the future official end of CHF LIBOR for all market participants. This date is particularly relevant since such change has since been communicated in the contractual arrangements in accordance with the contingency plans.
- Fixed spread-adjustment: We believe that the spread adjustment should be directly fixed in the implementing act, instead of a mere reference to the ISDA/Bloomberg website.
- Consistency across LIBOR tenors and currencies: the implementing act should not be limited to the 3M CHF LIBOR only, but consistency requires that a statutory replacement rate is designed also to other CHF LIBOR tenors irrespective whether the volume linked to such other tenors is significant or not. We encourage the Commission to have a broad view of the global relevance of the LIBOR discontinuation proposing a comprehensive pragmatic solution for discontinuation of LIBOR currencies and tenors (e.g USD LIBOR or JPY LIBOR) aligned to the recommendations and solutions adopted by the UK, US and other third countries competent authorities and central banks in order to ensure a seamless transition, avoid potential contract disruptions and to protect the consumers, the markets, and the legal certainty of the contracts. The industry also demands the application of the statutory fallback for EONIA linked contracts, as it will provide legal certainty to the transition from EONIA to €STR and will prevent unfair negotiations and potential market disruptions in collateral agreements where EONIA is the standard remuneration rate for cash collateral and thus, for the valuation of the derivative portfolio.
- Scope of financial contracts/instruments: Considering that 3M CHF LIBOR is mainly used in savings accounts, mortgages and loans, narrowing the scope of the statutory replacement rate as proposed by the Commission seems in principle to be appropriate in this particular case. However, any further statutory replacements regarding other critical benchmarks may require a significantly broader scope. We note the potential for financial market disruptions also in the area of other financial instruments (such as bonds) and even derivatives transactions because the conversion of such contracts is similarly complex and legally uncertain. Consequently, we believe that the scope of the statutory replacement rate should be applied to all possible financial contracts and financial instruments, in future implementing acts, as far as there is no fallback provision in the contractual documentation or not sufficient fallback provision agreed by the contractual parties until the cessation of the LIBOR settings.
- Compatibility with consumer protection law: Our members do not see an issue with the proposed implementing act and the relevant consumer protection law (e.g. Mortgage Credit Directive, Consumer Credit Directive, Directive 93/13/EEC). However we think it is important that the following requirements are fulfilled in order to be able to fully meet the relevant civil law requirements and for contract parties to verify their interest rate: (a) the interest rate should be made available by the administrator in a manner, that gives central and public access e.g. as is the case since 30 March 2021 by the SIX Index Data Centre; (b) the relevant spread-adjustment should be definitely fixed in the implementing act, and (c) implementing act clearly defines that no further action (i.e. conclusion of the annex to the contract, registration procedure of the new interest rate in the land register for mortgage loans) by the parties to the contract is required for replacement rate to take full effect. If the above is achieved, then banks would additionally be able to provide a proper implementation of their IT systems and to launch an appropriate information campaign towards clients.
Please download the EACB’s answer to the targeted consultation in the link for further information.
For any questions, contact:
Marieke van Berkel, Head of Department Retail Banking, Payments, Digitalisation and Financial Markets (firstname.lastname@example.org)
Tamara Chetcuti, Senior Adviser for Financial Markets (email@example.com)