10 Key Regulatory Focus Areas for UK/European Wholesale Markets in 2019

This blog post explores developments relating to the EU Benchmarks Regulation and the transition away from LIBOR. This is the third blog of this series, which has been taken from our wider publication: 10 Key Regulatory Focus Areas for UK/European Wholesale Markets in 2019 – Progress Report. Read the full publication here.

EU Benchmarks Regulation third-country regime 

As part of the amendments to the Regulation to introduce provisions on low carbon benchmarks, the EU legislators have agreed to extend the transitional period in relation to both critical benchmarks and third-country benchmarks. The transition will now run until the end of 2021, rather than the end of 2019. This is a welcome relief to non-EU entities that administer benchmarks that are used by firms in the EU, many of whom would not have been prepared to ensure their benchmarks’ continued use in the EU under the original deadline.

The European Commission has also started publishing draft equivalence decisions for certain third countries (a necessary precursor to the equivalence route, which is one of three ways in which third-country benchmarks can qualify for use in the EU once the transitional period has ended). However, the Commission appears to be taking a benchmark-by-benchmark approach, rather than granting equivalence by administrator, so an equivalence decision seemingly will not cover every benchmark of a given administrator, and each new benchmark will require its own equivalence decision.

LIBOR transition

LIBOR transition remains a key concern for the industry and regulators alike, with many worried about whether enough can be done in the time available to plan for a smooth transition. In June 2019 the FCA and the PRA published feedback from the responses they received to their September 2018 Dear CEO letter. This feedback emphasises that exposures to LIBOR can be found in an array of areas within a firm’s business, and that firms should undertake a comprehensive assessment of their exposures.

This assessment should also include identification of any associated prudential and conduct risks (for example, could information asymmetries in the market give rise to market abuse concerns). The regulators also highlighted that, while firms should be keeping pace with industry initiatives, they must not let a “wait and see” attitude inhibit their transition plans.

Meanwhile, ISDA continues to consult on options for adjustments that will apply to the relevant risk-free rates if fallbacks are triggered for derivatives. ISDA is also consulting on whether and how ISDA should address a determination that LIBOR is no longer representative in industry standard derivatives documentation. This consultation follows an FCA speech in which Edwin Schooling Latter suggested that firms should factor fallback triggers other than cessation of LIBOR into their transition planning.