Answer from DG FISMA Unit C.3 - Securities Markets to my questions related to the regulation on CHF-LIBOR.

Three weeks after I asked a couple of questions to the EU president related to the regulation on CHF-LIBOR, questions that were also posted on my blog, I have received an answer from DG FISMA Unit C.3 - Securities Markets.

The answer is posted below (minus the introduction and the signature)

The policy intention with this replacement was to ensure that the cessation of CHF LIBOR does not cause large-scale contract frustration for contract parties and holders of financial instruments in the EU. In accordance with the conditions for the exercise of the powers, set out in the Benchmark Regulation, the Commission has taken into account the recommendations made by the National Working Group on Swiss Franc reference rates, has conducted a public consultation in the spring of this year[1] and has published a draft of the implementing act for feedback in August[2]. To the extent we understand your detailed queries, the elements of the implementing act concerned were present in the draft act we published for consultation in August and were not considered by any of the respondents to be insurmountable obstacles. As you will also note from the successive drafts of the implementing act, much of the valuable input provided by the respondents was incorporated, leading to the implementing act as adopted and published in October.

As the law is by necessity general, it is not tailored to any specific case and may well be less than perfect in its application to some. There, as we hope you will acknowledge, lies the difference between law-making, where the interests of many must be balanced, and consultancy work, where the interests of the paymaster are the yardstick. For this reason, the implementing act expressly allows contract parties to agree otherwise on the fate of their contracts linked to CHF LIBOR, and they can do so before or after the statutory replacement takes effect.

There is no indication of what the references [1] and [2] are.

I had to indicate that their letter does not answer any of the questions asked. They only hide behind "were not considered by any of the respondents to be insurmountable obstacles", i.e. nobody complained officially in the narrow framework of the consultation.

Here is my answer to their non-answer.

In your text, you refer to references [1] and [2], but there is no indication on what those references are.

Unfortunately, the text does not appear to answer the issues I indicated. Even if there are several of those issues, I will focus on two for which the answer should be direct. They simply refer to how this text should be understood and implemented. There is also a debate about the more fundamental question to know if it is based on a sound method; to my opinion, the answer is no, this is fundamentally a flawed method, but I will skip that opinion debate here.

Question 1: What is the meaning of "1 month period preceding"?

I will compare this to the fallback definition used in the trades under ISDA definition. The original consultation by ISDA in July 2018 had a similarly simplistic description: "the relevant IBOR tenor". After numerous comments by market participants, including mine, the final version (IBOR fallback rate adjustment rule book) was published in 2020. The final version has 7 pages (Section 3, 4.1, and 4.2) just to define precisely the term "the relevant IBOR tenor".

The question here is simple and direct: What is the meaning of "1 month period preceding" in the regulation? Can you refer to a precise non ambiguous written definition?

Question 2: License

According to the new regulation, it is mandatory to use specific spreads to replace CHF-LIBOR when it still appears in contracts after 1 January 2022 in the EU; those spreads are the ones published by Bloomberg. According to the Bloomberg rule book, a (paid) license is required to use them. Is a license required to abide by the regulation? If no, can the Commission provide the relevant legal opinion; if yes, is the Commission paying for all the licenses required?

You indicate "As the law is by necessity general, it is not tailored to any specific case and may well be less than perfect in its application to some." To some extends, I agree with you, but the issues I'm reporting are on a different level; the issue is not that they are "less than perfect in its application to some", but that they are "ambiguous and potentially dangerous in its application to all".

On the form of your letter, I surprised by the terms "consultancy work, where the interests of the paymaster are the yardstick ". Over the last 4 years, I have provided a large amount of pro deo work for "the interests of many", including the Commission. The methodology used by the commission in its regulation, using a shorter in-advance period for the 6 and 12 months LIBOR, is the one I proposed in 2018 to improve earlier proposals. That method, even if improving on previous "in-advance" proposals, was, to my opinion, only the third best, but still an improvement. I hope you will acknowledge my generous contribution to law-making.

Maybe my earlier offer was misunderstood and I will rephrase it. If the Commission is looking for an independent external expertise for this or similar technical issues related to the interest rate financial markets, I would be glad to provide it.

Added 2021-12-10: More than a month after the original letter and after a couple of follow-up, still no answer regarding the meaning of the main sentence in the regulation. This is a scary state of affairs for financial regulations.

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