Is ISDA proposed fallback for EUR-LIBOR and EURIBOR EU BMR compliant?
ISDA has recently published a consultation on fallback for EUR-LIBOR and EUR-EURIBOR.
In the consultation questions, there is a question about the data to use for the computation of the spread historical median. The question refers to EONIA and pre-ESTR data.
From 1 January 2022, EONIA will not be a EU BMR compliant benchmark. Such a non-compliant benchmark cannot be used for the "determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices" (quote from EU BMR).
It appears it would imply that contracts referencing a spread fallback computed from EONIA rates would not be EU BMR compliant and forbidden in the European Union after 1 January 2022. I asked to ISDA if they obtained an explicit written indication from ECB, ESMA and/or national regulators that using EONIA figures in the fallback wording to LIBOR/EURIBOR-linked transactions is acceptable under EU BMR regulation after 1 January 2022.
The new European regulations have very strict compliance rules. It is important to check in advance the compliance of the proposed approaches with those rules. The best option for the market would be to have clear regulatory answer from the lawmakers and regulators before committing to such an approach.
Similarly, the consultation refers to pre-ESTR data. In its description of the pre-ESTR data, the ECB indicated explicitly that
It would be inappropriate to use those figures against the opinion of the benchmark administrator and the regulator. I asked to ISDA if they obtained an explicit written indication from ECB that using pre-ESTR figures as a benchmark in the fallback to LIBOR/EURIBOR-linked transactions is acceptable.
I will let you know if I receive an answer about those questions.
Added 1 February 2020: I sent a question to ISDA by email about the above issues on 15 January 2020 and I asked the questions with more details in my answers to the consultation. I have not received any answer yet. I guess that means that there is no "explicit indication from regulators that this wording is regulation compliant", but let's wait a little bit longer for more explanations.
In the consultation questions, there is a question about the data to use for the computation of the spread historical median. The question refers to EONIA and pre-ESTR data.
From 1 January 2022, EONIA will not be a EU BMR compliant benchmark. Such a non-compliant benchmark cannot be used for the "determination of the amount payable under a financial instrument or a financial contract by referencing an index or a combination of indices" (quote from EU BMR).
It appears it would imply that contracts referencing a spread fallback computed from EONIA rates would not be EU BMR compliant and forbidden in the European Union after 1 January 2022. I asked to ISDA if they obtained an explicit written indication from ECB, ESMA and/or national regulators that using EONIA figures in the fallback wording to LIBOR/EURIBOR-linked transactions is acceptable under EU BMR regulation after 1 January 2022.
The new European regulations have very strict compliance rules. It is important to check in advance the compliance of the proposed approaches with those rules. The best option for the market would be to have clear regulatory answer from the lawmakers and regulators before committing to such an approach.
Similarly, the consultation refers to pre-ESTR data. In its description of the pre-ESTR data, the ECB indicated explicitly that
The pre-ESTR is only a set of indicators for the ESTR. Its publication is for information purposes only and the data are not intended for use as a benchmark in any market transaction, whether directly or indirectly.
It would be inappropriate to use those figures against the opinion of the benchmark administrator and the regulator. I asked to ISDA if they obtained an explicit written indication from ECB that using pre-ESTR figures as a benchmark in the fallback to LIBOR/EURIBOR-linked transactions is acceptable.
I will let you know if I receive an answer about those questions.
Added 1 February 2020: I sent a question to ISDA by email about the above issues on 15 January 2020 and I asked the questions with more details in my answers to the consultation. I have not received any answer yet. I guess that means that there is no "explicit indication from regulators that this wording is regulation compliant", but let's wait a little bit longer for more explanations.
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