Communication to undertakings for collective investment and investment fund managers in the context of the imminent cessation of the major used interest benchmarks EONIA and LIBOR
Press release 21/28
This press release follows up on the CSSF publications dated 24 December 2019 and 25 June 2021 regarding EU Benchmarks Regulation1. It is addressed to all undertakings for collective investment (UCIs) and investment fund managers (IFMs) which are subject to the CSSF’s supervision and which are using benchmarks.
In light of the imminent cessation of the major used interest benchmarks EONIA and LIBOR, the CSSF expects UCIs and IFMs to ensure that they have taken all necessary action in view of a smooth transition to alternative rates.
The CSSF expects moreover that UCIs and IFMs are aware of the need to have in place robust fallback provisions covering a possible cessation of any other benchmarks used by them (if any), in accordance with Article 28(2) of the EU Benchmarks Regulation. Please be reminded that UCIs and IFMs shall, upon request, provide the CSSF with information about such fallback provisions and shall reflect them in the contractual relationship with investors.
In case UCIs or IFMs face any difficulties with regard to the transition to alternative rates, they should contact the CSSF in this respect (email: firstname.lastname@example.org).
In respect of EONIA, the CSSF reminds UCIs and IFMs that, as reiterated on 12 February 2021 by EONIA’s administrator (European Money Markets Institute, EMMI), EONIA will be discontinued on 3 January 2022 and as of this date, such UCIs and IFMs will no longer be able to use EONIA.
EMMI as well as the Euro Risk Free Rate Working Group recommended EONIA users to gradually replace EONIA with the risk-free rate “€STR”, which has been published by the European Central Bank since 2 October 2019 as a reference rate for all products and contracts, and to make all adjustments necessary for using the €STR as their standard benchmark after the transition period.
It should be noted that as of 22 October 2021 the European Commission has, by the way of an implementing regulation2, designated €STR as the replacement rate for EONIA (with as Spread Adjustment Value of 0.085%) in any contract and in any financial instrument as defined in Directive (EU) 2014/65 provided that such contracts or instruments do not contain fallback provisions or suitable fallback provisions. The implementing regulation will apply as of 3 January 2022.
In respect of LIBOR, the CSSF reminds UCIs and IFMs that on 5 March 2021, the UK Financial Conduct Authority (FCA) announced that all 35 LIBOR benchmark settings will cease to be provided by any administrator or will no longer be representative according to the following schedule:
- immediately after 31 December 2021, in the case of all GBP, EUR, CHF and JPY settings, and the 1-week and 2-month USD settings; and
- immediately after 30 June 2023, in the case of the remaining USD settings.
On 29 September 2021 the FCA confirmed that, in order to avoid disruption to legacy contracts3 that reference the 1-, 3- and 6-month GBP and JPY LIBOR settings, it will require LIBOR’s administrator IBA to publish these settings under a “synthetic” methodology, based on term risk-free rates, for the duration of 2022. The abovementioned LIBOR settings will be available only for use in legacy contracts, and are not for use in new business.
In this context, it is specifically reiterated that, apart from the further use in legacy contracts, a use of LIBOR by UCIs and IFMs will only be possible until the abovementioned dates.
Whilst the U.K. Working Group on Sterling Risk Free Rates has recommended SONIA as the preferred alternative rate for LIBOR rates quoted in GBP, the U.S. Alternative Reference Rates Committee promoted the SOFR as its preferred alternative to LIBOR. The FCA endorsed both, SONIA and SOFR as a viable alternative to LIBOR.
With regards to CHF LIBOR settings it should be noted that, as of 22 October 2021, the European Commission has, by the way of an implementing regulation4, designated the respective setting of the compounded SARON as the replacement rates for CHF LIBOR in any contract and in any financial instrument as defined in Directive (EU) 2014/65 provided that such contracts or instruments do not contain fallback provisions or suitable fallback provisions. The implementing regulation will apply as of 1 January 2022. Details with regards to the respective replacement rates and the respective spread adjustment values are listed in the table under Article 1 (2) of the implementing regulation.
As it is currently unknown whether the European Commission will use its powers to designate replacement benchmarks with respect to GBP, JPY or US dollar LIBOR settings, the CSSF strongly encourages UCIs and IFMs to actively reduce their exposure to such LIBOR settings and not to wait for the exercise by the European Commission to designate a replacement for the abovementioned LIBOR settings.
In case EURIBOR (which is BMR-compliant and can continue to be used for existing and new contracts/instruments) is used as a reference rate by UCIs and IFMs, the CSSF draws their attention to the publications of the Euro Risk Free Rate Working Group as of 11 May 2021 with respect to EURIBOR fallback trigger events and €STR-based EURIBOR fallback rates.
1 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014, as amended by Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 and Regulation (EU) 2021/168 of the European Parliament and of the Council of 10 February 2021
2 Commission Implementing Regulation (EU) 2021/1848 of 21 October 2021 on the designation of a replacement for the benchmark Euro overnight index average
3 In this context, legacy contracts are those contracts referencing Libor in which no fallback provisions are foreseen, no fallback provisions can be added and for which a switch to an alternative rate is not possible.
4 Commission Implementing Regulation (EU) 2021/1847 of 14 October 2021 on the designation of a statutory replacement for certain settings of CHF LIBOR