From 1 January 2022 onwards, the Benchmark Regulation (2016/1011/EU) will be directly applicable in each member state of the European Union. As a result, certain crucial interest rate benchmarks, such as EURIBOR, LIBOR and EONIA, shall not be admissible in its current form. From that point on, new financial agreements and, in principle, also existing financial agreements, which include the aforementioned interest rate benchmarks, should apply an alternative interest rate benchmark.
Since interest rate benchmarks are used in a wide variety of financial products and agreements, it may affect many aspects of business operations of institutions. Hence, institutions should prepare the transition to alternative interest rate benchmarks in a timely manner.
Questionnaire AFM and DNB (April 2019)
As a result of the transition to alternative interest rate benchmarks, on April 2019 the AFM and DNB sent a questionnaire to a number of banks, insurers and pension funds in order to obtain insight into the use of interest rate benchmarks, the identified transition risks by institutions and to what extent institutions have already taken action to prepare for the transition.
Findings of the questionnaire
The responses show, amongst other things, that the required contract amendments are a major risks for institutions. First of all, institutions should ensure that they have identified all financial agreements that refer to an interest rate benchmark. This is comprehensive work, which must be carried out in a timely manner. Subsequently, these financial agreements, where feasible, should be amended to include an alternative interest rate benchmark. Such amendment could lead to a conflict between the contracting parties whether to modify or terminate the financial agreement. In addition, there is also a risk that some amended financial agreements, which are currently exempt from legislation such as margin and clearing obligations and reporting in trade repositories, could fall under the scope of this provisions.
Based on the responses to the questionnaire, the AFM and DNB have identified the following best practices in order to encourage institutions for the transition to alternative benchmarks and the amendments of financial agreements in a timely manner:
- Make a detailed and complete list of the use of actual benchmarks throughout the organization, as well as the maturity of these benchmark.
- Identify alternative benchmarks for specific product groups, and use them where feasible.
- Put a centrally organized project team together, which may supervise and report all benchmark related activities within the institution at an administrative level. It is important to ensure that the project team works with a timetable consistent with the timing of the transition.
- Use external advisers or attend market events such as round-table discussions to acquire knowledge.
Should you have any questions on the Benchmark Regulation or be confronted with an alternative benchmark and have questions or queries in that regard, please contact Jason van de Pol and Nuray Aslan.