EU prepares for end of LIBOR financial benchmark
Markets
(BRUSSELS) - The European Parliament and EU Council reached provisional agreement Tuesday on key amendments to EU rules on financial benchmarks, in preparation for the end of LIBOR on December 31 2021.
The LIBOR (London Inter-Bank Offered Rate) index measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties.
LIBOR is being discontinued because of interest rate manipulation stemming back to as early as 2003. Approximately $350 trillion worth of financial contracts reference LIBOR globally.
The amendments to the Benchmark Regulation are designed to ensure that the EU's financial stability is not harmed when a widely used benchmark is phased out. Benchmarks are seen as an intrinsic part of financial markets: indices used in particular to price financial instruments and contracts (including household mortgages) or to measure the performance of an investment fund.
The UK's Financial Conduct Authority - the supervisor of LIBOR - announced in 2017 that it will stop supporting this benchmark at the end of 2021 and expects its cessation shortly thereafter. The amendments empower the Commission to designate a replacement benchmark that covers all references to a widely used reference rate that is phased out, such as LIBOR, when this is necessary to avoid disruption of the financial markets in the EU.
The Commission welcomed agreement on the amendments, which it proposed in July. “I welcome today's swift agreement on financial benchmarks, which means that we will now not be faced with a legal vacuum when LIBOR disappears," said financial services Commissioner Mairead McGuinness: "This will ensure continuity in our financial system and protect our financial stability. Market participants should nonetheless continue preparations for the end of LIBOR.”
Regarding other “-IBOR” rates, the EU executive says it is still in market participants' best interests to actively prepare for the transition to alternative reference rates, as this offers them the greatest degree of control over the fate of contracts if a reference rate ceases to be published. Parliament and Council also agreed today to postpone the entry into application of the rules on third country benchmarks until 31 December 2023, with the possibility of an extension by the Commission afterwards. This means that EU benchmark users will continue to have access to these benchmarks.
The agreed amendments will apply immediately after publication in the Official Journal of the European Union.
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