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More Time Required Before Phasing Out of Key Reference Rates

Thanks to the EU Benchmarks Regulation (BMR), several key reference rates currently face either replacement or reform. These include the Euro Interbank Offered Rate (Euribor) and the Euro OverNight Index Average (Eonia). In making these changes, the EU and the financial services sector have to balance the requirement for more robust reference rates with the need to maintain business-as-usual for benchmark users in order to ensure minimal market disruption.

At present, it’s possible that the January 2020 deadline for finding replacements to these key rates will not be met. At a recent meeting of a working group set up by the European Central Bank (ECB) to look into the issue, participants noted that ‘the transition from Eonia to the new euro risk-free rate and the uncertainty around the future of Euribor make the process very challenging’. Importantly, the ECB working group discussed the possibility of an extension beyond the January 2020 deadline for replacing or amending Eonia and Euribor.

Meanwhile, the EU itself has further signalled its openness to a delay in the withdrawal of key rates. MEPs have proposed a two-year reprieve for Eonia and Euribor if contractual continuity is at risk; providing the strongest indication yet there will be a continuing safety net beyond 2020. This is no doubt influenced by the fact that the planned replacement for Eonia – the Euro Short-Term Rate (Ester) – won’t be published until October 2019, and the reform of Euribor won’t be finished until the first half of 2019 (and it’s not a given that it will be approved under BMR following this reform).

In the face of this continued uncertainty, it’s essential that benchmark users do everything in their power to protect their businesses. One element of this preparation is to establish an effective mechanism for monitoring the benchmarks landscape to ensure that all changes are identified quickly, and relevant financial instruments and contracts updated accordingly. Additionally, benchmark users need to ensure they have readied a list of alternative benchmarks and rates to use in the event an existing benchmark is withdrawn from use.

It is still far from certain what the benchmarks landscape will look like two years hence, or which rates will be approved for use. In these uncertain times, it’s more important that ever for firms to put in place agile, data-driven compliance processes and systems to remain on the right side of regulation and maintain the smooth functioning of the business.

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