Upcoming EU Interbank Offered Rates ('IBOR') Transition
The main aim of the Action Plan and the related communications made by the ECB is to support the market in the implementation of the transition away from EONIA. As such, application of any of the ECB's 33 recommendations is at the full discretion of market participants.
The European Central Bank's ("ECB") working group on euro risk-free rates published earlier this week its final recommendations regarding the EONIA to STR Legal Action Plan subsequent to the third public consultation issued in this respect. The EONIA to STR Action Plan covers legacy and new agreements referencing EONIA in different contexts (in particular derivative transactions, collateral agreements and cash products) and was developed by the ECB working group in coordination with some of the major market participants. The main aim of the Action Plan and the related communications made by the ECB is to support the market in the implementation of the transition away from EONIA. As such, application of any of the ECB's 33 recommendations is at the full discretion of market participants.
The key recommendations are as follows:
as from 2 October 2019, avoiding entering into any new contracts referencing EONIA, in particular where these contracts have a maturity date after 31 December 2021; for legacy contracts maturing after 31 December 2021 and referencing EONIA, replacing EONIA as primary rate as soon as possible or ensuring the implementation of robust fallback clauses referring to a fallback rate; designatingSTR plus a spread as the fallback rate to be chosen in replacement of EONIA, irrespective of the type of product or purpose involved. This ECB initiative took place as part of a broader shift in the EU IBORs framework, resulting in a global transition from the use of IBORs to the use of alternative benchmarks, mainly consisting of risk-free rates ("RFRs"). A large number of market participants have become accustomed to using IBORs for multiple financial products since the 1980s. Nevertheless, IBORs' vulnerability to misconducts and conflicts of interest has in particular been illustrated in the difficulties encountered by the administrators of such benchmarks when facing the new requirements...
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