Legal development

European Commission consults on proposed statutory replacement rate for Swiss Franc LIBOR under EU

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    On 23 March 2021, the European Commission launched a consultation asking for feedback on whether a statutory replacement rate should be designated for Swiss Franc LIBOR under the recently amended EU Benchmarks Regulation (EU BMR) and, if so, what that rate should be.

    Earlier this month, the UK's Financial Conduct Authority (FCA) announced the dates on which all 35 LIBOR currency/tenor combinations will either cease to be published or will cease to be representative of their underlying market. Subject to consultation by the FCA, certain LIBOR rates may continue to be published on a "synthetic" basis using a changed methodology, but Swiss Franc LIBOR is to be discontinued from the end of 2021, along with Euro LIBOR and certain Sterling, US Dollar and Japanese Yen LIBOR tenors.

    The proposed replacement rate follows the recommendations of the Swiss National Working Group on Swiss Franc Reference Rates and comprises:

    1. compounded SARON (which is published by SARON's administrator, SIX, each business day); plus
    2. the applicable spread adjustment calculated pursuant to the ISDA methodology (which uses the historical median approach over a five-year lookback period).

    The proposed replacement rate methodology would use the "last-reset" method to allow an in-advance setting. Under this method, the rate for a particular calculation period is determined using data from the previous calculation period, allowing the rate to be determined and communicated prior to its application, in compliance with EU consumer rules.

    The Commission also plans to consult in due course on fallbacks for the most heavily-used Sterling and US Dollar tenors, as well as for EONIA, which is to be discontinued from 3 January 2022. However, Swiss Franc LIBOR is being considered as a priority due to its prevalence in EU residential mortgages and other consumer contracts - most of which do not contain contractual fallback arrangements - and the adverse impact on financial stability that this could have. A key concern is that, absent a designated statutory replacement rate, private fallback or transition negotiations could give rise to disputes as to the appropriateness of the contractually agreed replacement. Designation of a specific replacement rate by the Commission in a timely manner would reduce this risk.

    Any statutory replacement rate would only apply in respect of certain EU-law governed contracts entered into prior to application of the EU BMR on 1 January 2018, as contracts entered into after that date are required by the EU BMR to contain appropriate fallback provisions.

    The consultation closes on 18 May 2021. Thereafter, the Commission will adopt an implementing act under the EU BMR designating the final statutory replacement rate for use in applicable contracts after 31 December 2021.

    To find out more, please feel free to get in touch with the team below or your usual Ashurst contact.

    Authors: Mike Logie and Kirsty McAllister-Jones

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
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