The European Central Bank has published a report by the working group on euro risk-free rates providing high-level recommendations for fall-back provisions in contracts for cash products and derivatives transactions referencing EURIBOR. The recommendations are not legally binding and market participants can decide whether, and to the extent to which, they wish to adopt them. EURIBOR were identified as critical benchmarks for the purposes of the EU Benchmarks Regulation and the methodology for calculating EURIBOR has been revised to be Benchmark Regulation-compliant, to be implemented by the end of 2019. The working group published Guiding Principles for fallback provisions in cash products in January 2019.
This latest set of recommendations builds on those Guiding Principles and takes into account the developments since January. The paper confirms that EURIBOR is not due to be discontinued, as is the case for EONIA, which will be replaced by €STR. Contracts and financial instruments referencing EURIBOR do not need to transition to a new rate. However, fallback provisions must be incorporated in those contracts. The working group recommends, among other things, that market participants should:
- consider including fallback provisions for new contracts referencing EURIBOR, and those provisions should include provisions covering both permanent and temporary cessation trigger events as well as flexibility for the application of a new rate and appropriate consents for amendments;
- consider including in new contracts adjustments to address differences between the value of EURIBOR and the value of the fallback rate;
- for legacy contracts entered into after January 1, 2018, ensure compliance with the obligation in the EU Benchmark Regulation to have written plans in the event that a benchmark ceases or materially changes; and
- consider including fallback provisions in legacy contracts referencing EURIBOR.
The working group has also provided a generic EURIBOR fallback provision.