European Commission
Reducing exposures to LIBOR - European Commission, EBA, ESMA and the ECB issue joint statement - 24 June 2021
The European Commission, together with the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) (in its banking supervisory capacity (ECB Supervision)) have jointly issued a statement to encourage all market participants to cease their use of all LIBOR settings. Market participants are urged to reduce their exposure to LIBOR and not wait for the exercise by the Commission of its new powers to designate a replacement under Article 23b of the Benchmarks Regulation (EU) 2016/1011.
Market participants should use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposure to these interest rates by:
- stopping the use of the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and in any event by 31 December 2021;
- limiting the use of any LIBOR setting published under a changed methodology (known as synthetic LIBOR) only to contracts that are particularly difficult to amend before LIBOR’s cessation (commonly referred to as ‘tough legacy contracts’); and
- including robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.
Joint statement: Forthcoming cessation of all LIBOR settings
Press release
European Securities and Markets Authority
Credit rating agencies - ESMA publishes technical advice on supervisory fees charged - 21 June 2021
The European Securities and Markets Authority (ESMA) has published a final report (ESMA80-196-5170) setting out its technical advice to the European Commission on supervisory fees charged to credit rating agencies (CRAs). To prepare the technical advice, ESMA published a consultation paper in January 2021, and an overview of responses is outlined in the final report. Respondents raised concerns about increasing fees, the impact of Brexit and ensuring the fees changed are proportionate to the work undertaken. Some amendments have been made to the technical advice in light of the responses received.
In the technical advice ESMA proposes changes to the calculation and collection of supervisory fees set out in Commission Delegated Regulation (EU) 272/2012 (Fees Regulation), including a fixed fee of EUR40,000 and an annual supervisory fee of 0.5% of turnover to CRAs with annual revenues of between EUR4 million to 15 million. ESMA considers that the proposed changes will ensure it meets the regulatory obligation to charge fees that cover its costs, while remaining proportionate to the revenues of the CRAs supervised. It has not recommended changes to the calculation of annual supervisory fees paid by CRAs with annual revenues of over EUR15 million which are already calculated proportionately to cover ESMA’s costs.
ESMA also recommends a number of changes to streamline the fee collection process and align its approach across supervisory mandates. The technical advice has been sent to the European Commission and will feed into the upcoming review of the Fees Regulation.
Report: Technical Advice on Fees Charged to CRAs by ESMA (ESMA80-196-5170)
Press release
HM Treasury
Securitisation Regulation in the UK - HM Treasury launches call for evidence - 24 June 2021
HM Treasury has published a call for evidence in relation to its review of the onshored Securitisation Regulation ((EU) 2017/2402) with a view to ensuring that it “best delivers for the UK’s financial sector and real economy”. In particular, it seeks views on how the UK’s securitisation market is performing and how the Securitisation Regulation can be tailored to the UK. The aims of the review are:
- to bolster securitisation standards in the UK, in order to enhance investor protection and promote market transparency; and
- to support and develop securitisation markets in the UK, including through the increased issuance of STS securitisations, in order to increase their contribution to the real economy.
The call for evidence is described as “a targeted review of the regulatory approach taken” under the onshored version of the Regulation. It notes that HM Treasury is separately conducting a wider Future Regulatory Framework (FRF) Review to determine how the overall framework for financial services will need to adapt to the UK’s position outside of the EU.
HM Treasury is using the opportunity of this call for evidence to seek more detailed views on two potential changes which might be brought forward at the appropriate legislative opportunity:
- whether a change is required to scope out certain non-UK Alternative Investment Fund Managers (AIFMs) marketing in the UK from certain requirements in the Securitisation Regulation; and
- whether it would be desirable to introduce an equivalence regime for simple, transparent and standardised securitisations (STS).
Comments are welcomed before 2 September 2021. Responses will inform the government’s review of the legislation and a report is expected to be laid before Parliament by 1 January 2022.
Call for evidence: Review of the Securitisation Regulation
Webpage
Bank of England
UK central counterparties - Bank of England publishes discussion paper on supervisory stress test framework - 21 June 2021
The Bank of England (BoE) has published a discussion paper on supervisory stress testing of UK central counterparties (CCPs) and announced its first public CCP stress test. In recognition of the growing importance of CCPs, the BoE has been developing its approach to UK CCP supervisory stress testing and is working towards publication of a framework for undertaking supervisory stress-testing of CCPs.
Following a pilot CCP supervisory stress-test exercise in 2019, the BoE is launching its first public CCP supervisory stress test around the start of Q4 2021 which will run over a nine-month period. The three recognised UK CCPs (ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd) will participate, and all of their clearing services will be in scope. This stress test will be exploratory in nature, the CCPs will not be tested against regulatory requirements and there will be no pass-fail thresholds. If, however, deficiencies are identified, the BoE will take remedial action. The outcomes from the exercise will be published around the end of Q2 2022.
The BoE intends to use CCP supervisory stress testing as a key mechanism through which to undertake assessments of the resilience of individual CCPs, as well as assessments of the broader resilience of the clearing network and its interactions with the rest of the financial system. CCP supervisory stress tests will also be used to promote transparency and help establish public confidence in the UK CCP system.
In the discussion paper, the BoE sets out a range of proposals and options for the design of the CCP supervisory stress-testing framework. In some areas, the BoE already has clear proposals and a direction in mind. For example, it proposes to use supervisory stress testing to assess both credit and liquidity risk in full. In other areas, the BoE is considering a broader range of options, for example, relating to market shock scenario design and alternative default assumptions.
Comments can be made on the discussion paper until 17 December 2021. The BoE will use the responses received, in conjunction with the findings from the 2021-22 stress test, to inform further development of the CCP supervisory stress-test framework.
Discussion paper: Supervisory Stress Testing of Central Counterparties
Financial Conduct Authority
Proposed Decision to require synthetic LIBOR for 6 sterling and Japanese yen settings - FCA publishes consultation - 24 June 2021
The FCA has published a consultation paper (CP21/9) seeking views on its proposal to use its “methodology change” powers under Article 23D(2) of the Benchmarks Regulation (EU) 2016/1011 (BMR) as introduced by the Financial Services Act 2021.
The FCA said that it would consult on using its new powers under the BMR to require the 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings to be determined under a changed methodology (in other words, on a ‘synthetic’ basis) after the end of 2021. It intends to compel the publication of the 3 Japanese yen LIBOR settings for 1 year only until the end of 2022, after which they will cease. The FCA proposes to use its Article 23D(2) powers to require a synthetic LIBOR to be calculated using a forward-looking term version of the relevant risk-free rate (i.e. SONIA for sterling and TONA for yen) and the fixed ISDA spread adjustment published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol for the respective LIBOR setting.
The FCA notes that, for sterling, there are 2 term SONIA reference rates (TSRRs) provided by Refinitiv and IBA. Both TSRRs are compliant with BMR requirements. The FCA has selected the TSRR provided by IBA as a component for the specific purpose of a potential synthetic sterling LIBOR. For yen, it has selected the Tokyo Term Risk Free Rate (TORF) provided by QUICK Benchmarks Inc (QBS) as a component for a potential synthetic yen LIBOR. TORF is recommended by the Japanese Cross-Industry Committee to help transition in the cash market and is the only forward-looking term RFR for yen.
The FCA considers that its proposed decision is in line with its policy framework for whether and how it would use the Article 23D(2) powers to ensure an orderly cessation of a critical benchmark, which was published in final form in March 2021.
The consultation is open for 9 weeks. Where a synthetic LIBOR is implemented, the FCA will also need to determine who will be permitted to use it. A separate consultation on its proposed policy in this regard closed on 17 June 2021. The FCA states that it will aim to consult further in the third quarter on a proposed decision on precisely what legacy use to allow for any synthetic sterling and yen LIBOR.
Finally, the FCA reminds market participants that any synthetic LIBOR will be time limited and is intended as a safety-net only for contracts that cannot transition.
Consultation paper: Proposed decision under Article 23D BMR for 6 sterling and yen LIBOR settings (CP21/9)
Webpage
Statement
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Prospectus Regulation - Primary Market Bulletin No.34 published by the FCA - 24 June 2021
The FCA has published its Primary Market Bulletin No.34. Among other things, this edition addresses the creation of a new Technical Note to adapt, as FCA Guidance, the European Securities and Markets Authority’s (ESMA) Guidelines on disclosure requirements under the Prospectus Regulation ((EU) 2017/1129). It also deals with the incorporation of certain explanations in ESMA’s Q&As on Prospectuses on the FCA Handbook site into Technical Notes.
The FCA notes that it will no longer refer to the CESR Recommendations and the Q&As on Prospectuses on its Handbook site. The relevant substantive content will be consolidated into the FCA’s Technical Notes. The FCA intends to consult in the September 2021 Quarterly Consultation Paper on removing these from the FCA Handbook site and on consequential amendments to the Prospectus Regulation Rules, as well as taking the opportunity to update a Procedural Note and several other Technical Notes.
Primary Market Bulletin No.34
Guidance consultation: GC21/1: Primary Market Bulletin No.34
Investment Association
LIBOR - Investment Association calls for collective effort in final stage of LIBOR-linked bond transition - 22 June 2021
The Investment Association (IA) has published a document calling for increased efforts to ensure that the LIBOR-linked bond transition deadline of 31 December is met, noting that there are a large number of outstanding LIBOR-linked bonds which have still not yet moved to a new rate.
The IA describes this as a matter of “serious concern” for the industry (and particularly for the buy-side) and calls on all market participants to actively engage amongst themselves in order to ensure effective collaboration and successful transition by the deadline.
The FCA confirmed the cessation dates for all panel bank LIBOR setting on 5 March 2021, as previously reported in this Bulletin. The Bank of England expects all legacy sterling LIBOR contracts, wherever possible, to have been amended by the end of the third quarter of 2021 to include at least a contractually robust fall-back that takes effect on an appropriate event, or preferably, an agreed conversion to a robust alternative reference rate.
Encouraging Transition of LIBOR Linked Bonds
Press release
Please see the Banking and Finance section for an item on the extension by the European Commission of the transition period for treatment of exposures to third-country CCPs until June 2022.
