Legal provisions of COM(2020)337 - Amending regulation 2016/1011 on exemptions of third country foreign exchange benchmarks and replacement benchmarks for certain benchmarks in cessation - Main contents

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dossier	COM(2020)337 - Amending regulation 2016/1011 on exemptions of third country foreign exchange benchmarks and replacement benchmarks for ...
document	COM(2020)337
date	February 10, 2021

Article 1 - Amendments to Regulation (EU) 2016/1011
Article 2 - Amendment to Regulation (EU) No 648/2012
Article 3

Article 1 - Amendments to Regulation (EU) 2016/1011

Regulation (EU) 2016/1011 is amended as follows:

(1)

in Article 2(2), the following point is added:

‘(i)	a spot foreign exchange benchmark which has been designated by the Commission in accordance with Article 18a(1).’;

(2)

in Article 3, paragraph 1 is amended as follows:

(a)

the following point is inserted:

‘(22a)

“spot foreign exchange benchmark” means a benchmark which reflects the price, expressed in one currency, of another or a basket of other currencies, for delivery on the earliest possible value date;’;

(b)

in point 24(a), point (i) is replaced by the following:

‘(i)

a trading venue as defined in point (24) of Article 4(1) of Directive 2014/65/EU or a trading venue in a third country for which the Commission has adopted an implementing decision that the legal and supervisory framework of that country is considered to have equivalent effect within the meaning of Article 28(4) of Regulation (EU) No 600/2014 of the European Parliament and of the Council (*1) or Article 25(4) of Directive 2014/65/EU of the European Parliament and of the Council, or a regulated market considered to be equivalent under Article 2a of Regulation (EU) No 648/2012, but in each case only with reference to transaction data concerning financial instruments;

(*1) Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, p. 84).’;"

(3)	in Title III, the title of Chapter 2 is replaced by the following: ‘ Interest rate benchmarks and spot foreign exchange benchmarks ’;

(4)

the following Article is inserted:

‘Article 18a

Spot foreign exchange benchmarks

1. The Commission may designate a spot foreign exchange benchmark that is administered by administrators located outside the Union where both of the following criteria are fulfilled:

(a)	the spot foreign exchange benchmark references a spot exchange rate of a third-country currency that is not freely convertible; and

(b)	the spot foreign exchange benchmark is used on a frequent, systematic and regular basis to hedge against adverse foreign exchange rate movements.

2. By 31 December 2022, the Commission shall conduct a public consultation to identify spot foreign exchange benchmarks that fulfil the criteria laid down in paragraph 1.

3. By 15 June 2023, the Commission shall adopt a delegated act in accordance with Article 49 to create a list of spot foreign exchange benchmarks that fulfil the criteria laid down in paragraph 1 of this Article. The Commission shall update that list as appropriate.’;

(5)

in Title III, the following chapter is inserted:

‘CHAPTER 4A

Statutory replacement of a benchmark

Article 23 - a Scope of the statutory replacement of a benchmark

This Chapter applies to:

(a)	any contract, or any financial instrument as defined in Directive 2014/65/EU, that references a benchmark and is subject to the law of one of the Member States; and

(b)	any contract, the parties to which are all established in the Union, that references a benchmark and that is subject to the law of a third country and where that law does not provide for the orderly wind-down of a benchmark.

Article 23 - b Replacement of a benchmark by Union law

1. This Article shall apply to:

(a)	benchmarks designated as critical by an implementing act adopted pursuant to point (a) or (c) of Article 20(1);

(b)	benchmarks based on the contribution of input data if their cessation or wind-down would significantly disrupt the functioning of financial markets in the Union; and

(c)	third-country benchmarks if their cessation or wind-down would significantly disrupt the functioning of financial markets in the Union or pose a systemic risk to the financial system in the Union.

2. The Commission may designate one or more replacements for a benchmark provided that any of the following events has occurred:

(a)

the competent authority for the administrator of that benchmark has issued a public statement, or has published information, in which it is announced that that benchmark no longer reflects the underlying market or economic reality; in the case of a benchmark designated as critical by an implementing act adopted pursuant to point (a) or (c) of Article 20(1), the competent authority shall make such an announcement only where, following the exercise of the powers set out in Article 23, the benchmark still does not reflect the underlying market or economic reality;

(b)

the administrator of that benchmark, or a person acting on behalf of that administrator, has issued a public statement, or has published information, or such public statement has been made or such information has been published, in which it is announced that that administrator will commence the orderly wind-down of that benchmark or will cease to provide that benchmark or certain tenors or certain currencies for which that benchmark is calculated permanently or indefinitely, provided that, at the time of the issuance of the statement or the publication of the information, there is no successor administrator that will continue to provide that benchmark;

(c)

the competent authority for the administrator of that benchmark or any entity with insolvency or resolution authority over such administrator has issued a public statement, or has published information, in which it is stated that the administrator will commence the orderly wind-down of that benchmark or will cease to provide that benchmark or certain tenors or certain currencies for which that benchmark is calculated permanently or indefinitely, provided that, at the time of the issuance of the statement or the publication of the information, there is no successor administrator that will continue to provide that benchmark; or

(d)

the competent authority for the administrator of that benchmark withdraws or suspends the authorisation in accordance with Article 35 or the recognition in accordance with Article 32(8) or requires the cessation of the endorsement in accordance with Article 33(6), provided that, at the time of the withdrawal or suspension or the cessation of endorsement, there is no successor administrator that will continue to provide that benchmark and its administrator will commence the orderly wind-down of that benchmark or will cease to provide that benchmark or certain tenors or certain currencies for which that benchmark is calculated permanently or indefinitely.

3. For the purposes of paragraph 2 of this Article, the replacement for a benchmark shall replace all references to that benchmark in contracts and financial instruments as referred to in Article 23a where those contracts and financial instruments contain:

(a)	no fallback provision; or

(b)	no suitable fallback provisions.

4. For the purpose of point (b) of paragraph 3, a fallback provision shall be deemed unsuitable if:

(a)	it does not provide for a permanent replacement for the benchmark in cessation; or

(b)	its application requires consent from third parties that has been denied; or

(c)	it provides for a replacement for a benchmark which no longer reflects or significantly diverges from the underlying market or the economic reality that the benchmark in cessation is intended to measure, and its application could have an adverse impact on financial stability.

5. The replacement for a benchmark agreed as a contractual fallback rate no longer reflects or significantly diverges from the underlying market or the economic reality that the benchmark in cessation is intended to measure, and could have an adverse impact on financial stability, where:

(a)	that has been established by the relevant national authority on the basis of a horizontal assessment of a specific type of contractual arrangement that has been performed following a motivated request of at least one interested party, and after having consulted the relevant stakeholders;

(b)	following an assessment in accordance with point (a), one of the parties to the contract or financial instrument has objected to the contractually agreed fallback provision at the latest three months before the cessation of the benchmark; and

(c)	following an objection pursuant to point (b), the parties to the contract or financial instrument have not agreed on an alternative replacement for the benchmark at the latest one working day before the cessation of that benchmark.

6. For the purposes of point (c) of paragraph 4, the relevant national authority shall, without undue delay, inform the Commission and ESMA of its assessment referred to in point (a) of paragraph 5. Where entities in more than one Member State could be affected by the assessment, the relevant authorities of all those Member States shall conduct the assessment jointly.

7. Member States shall designate a relevant authority that is in the position to conduct the assessment referred to in point (a) of paragraph 5. Member States shall inform the Commission and ESMA of the designation of the relevant authorities by 14 August 2021.

8. The Commission shall adopt implementing acts to designate one or more replacements for a benchmark in accordance with the examination procedure referred to in Article 50(2) where any of the events referred to in paragraph 2 of this Article have occurred.

9. An implementing act as referred to in paragraph 8 shall include the following:

(a)	the replacement or replacements for a benchmark;

(b)

the spread adjustment, including the method for determining such spread adjustment, that is to be applied to the replacement for a benchmark in cessation on the date of the replacement for each particular term to account for the effects of the transition or change from the benchmark to be wound down to its replacement;

(c)	the corresponding essential conforming changes that are associated with and reasonably necessary for the use or application of a replacement for a benchmark; and

(d)	the date from which the replacement or replacements for a benchmark applies.

10. When adopting an implementing act as referred to in paragraph 8, the Commission shall take into account available recommendations on the replacement for a benchmark, the corresponding conforming changes and the spread adjustment made by the central bank responsible for the currency area in which the relevant benchmark is being wound down, or by the alternative reference rate working group operating under the auspices of the public authorities or the central bank. Before adopting the implementing act, the Commission shall conduct a public consultation and shall take into account the recommendations of other relevant stakeholders, including the competent authority of the benchmark administrator and ESMA.

11. Notwithstanding point (c) of paragraph (5) of this Article, a replacement for a benchmark designated by the Commission in accordance with paragraph 2 of this Article shall not apply where all parties or the required majority of parties to a contract or financial instrument referred to in Article 23a have agreed to apply a different replacement for a benchmark whether before or after the date of application of the implementing act referred to in paragraph 8 of this Article.

Article 23 - c Replacement of a benchmark by national law

1. The national competent authority of a Member State where the majority of contributors is located may designate one or more replacements for a benchmark as referred to in point (b) of Article 20(1), provided that any of the following events has occurred:

(a)

the competent authority for the administrator of that benchmark has issued a public statement, or has published information, in which it is announced that that benchmark no longer reflects the underlying market or economic reality; the competent authority shall make such an announcement only where, following the exercise of the powers set out in Article 23, the benchmark still does not reflect the underlying market or economic reality;

(b)

(c)

the competent authority for the administrator of that benchmark or any entity with insolvency or resolution authority over such administrator has issued a public statement, or has published information, in which it is stated that that administrator will commence the orderly wind-down of that benchmark or will cease to provide that benchmark or certain tenors or certain currencies for which that benchmark is calculated permanently or indefinitely, provided that, at the time of the issuance of the statement or the publication of the information, there is no successor administrator that will continue to provide that benchmark; or

(d)

the competent authority for the administrator of that benchmark withdraws or suspends the authorisation in accordance with Article 35, provided that, at the time of the withdrawal or suspension, there is no successor administrator that will continue to provide that benchmark and its administrator will commence the orderly wind-down of that benchmark or will cease to provide that benchmark or certain tenors or certain currencies for which that benchmark is calculated permanently or indefinitely.

2. Where a Member State designates one or more replacements for a benchmark in accordance with paragraph 1, the competent authority of that Member State shall immediately notify the Commission and ESMA thereof.

3. The replacement for a benchmark shall replace all references to that benchmark in contracts and financial instruments as referred to in Article 23a where both of the following conditions are fulfilled:

(a)	those contracts or financial instruments reference the benchmark in cessation on the date on which the national law designating the replacement for a benchmark becomes applicable; and

(b)	those contracts or financial instruments contain no fallback provision or contain a fallback provision that does not provide for a permanent replacement for the benchmark in cessation.

4. A replacement for a benchmark designated by a competent authority in accordance with paragraph 1 of this Article shall not apply where all parties or the required majority of the parties to a contract or financial instrument as referred to in Article 23a have agreed to apply a different replacement for a benchmark whether before or after the date of application of the relevant provision of national law.’;

(6)

in Article 28, paragraph 2 is replaced by the following:

‘2. Supervised entities other than an administrator as referred to in paragraph 1 that use a benchmark shall produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided. Where feasible and appropriate, such plans shall designate one or several alternative benchmarks that could be referenced to substitute the benchmarks that would no longer be provided, indicating the reasons for the suitability of such alternative benchmarks. The supervised entities shall, upon request and without undue delay, provide the relevant competent authority with those plans and any updates and shall reflect them in their contractual relationship with clients.’;

(7)	in Article 29, the following paragraph is inserted: ‘1a. A supervised entity may also use the replacement for a benchmark designated in accordance with Article 23b or Article 23c.’;

(8)

Article 49 is amended as follows:

(a)	the following paragraph is inserted: ‘2b. The power to adopt delegated acts referred to in Articles 18a(3) and 54(7) shall be conferred on the Commission for an indeterminate period of time from 13 February 2021.’;

(b)

the following paragraph is inserted:

‘3a. The delegation of power referred to in Articles 18a(3) and 54(7) may be revoked at any time by the European Parliament or by the Council. A decision to revoke shall put an end to the delegation of power specified in that decision. It shall take effect on the day following the publication of the decision in the Official Journal of the European Union or on a later date specified therein. It shall not affect the validity of any delegated acts already in force.’;

(c)

the following paragraph is added:

‘6a. A delegated act adopted pursuant to Article 18a(3) or 54(7) shall enter into force only if no objection has been expressed either by the European Parliament or by the Council within a period of three months of notification of that act to the European Parliament and to the Council or if, before the expiry of that period, the European Parliament and the Council have both informed the Commission that they will not object. That period shall be extended by three months at the initiative of the European Parliament or of the Council.’;

(9)

in Article 51, paragraph 5 is replaced by the following:

‘5. Unless the Commission has adopted an equivalence decision as referred to in paragraph (2) or (3) of Article 30, an administrator has been recognised pursuant to Article 32 or a benchmark has been endorsed pursuant to Article 33, the use in the Union by supervised entities of a third-country benchmark shall be permitted only for financial instruments, financial contracts and measurements of the performance of an investment fund that already reference that benchmark or which add a reference to such benchmark before 31 December 2023.

The first subparagraph shall not apply to benchmarks provided by administrators who relocate from the Union to a third country during the transitional period. The competent authority shall notify ESMA in accordance with Article 35. ESMA shall draw up a list of third-country benchmarks to which the first subparagraph does not apply.’;

(10)

in Article 54, paragraph 6 is replaced by the following:

‘6. By 15 June 2023, the Commission shall submit a report to the European Parliament and to the Council on the scope of this Regulation, in particular with respect to the continued use by supervised entities of third-country benchmarks and on potential shortcomings of the current framework. That report shall assess in particular whether there is a need to amend this Regulation in order to reduce its scope to the provision of certain types of benchmarks or to the provision of benchmarks that are widely used in the Union and shall be accompanied, where appropriate, by a legislative proposal.

7. The Commission is empowered to adopt a delegated act in accordance with Article 49 by 15 June 2023 in order to extend the transitional period referred to in Article 51(5) until 31 December 2025 at the latest if the report referred to in paragraph 6 of this Article demonstrates that, otherwise, the continued use in the Union of certain third-country benchmarks by supervised entities would be significantly impaired or would pose a threat to financial stability.’.

Article 2 - Amendment to Regulation (EU) No 648/2012

Article 13a of Regulation (EU) No 648/2012 is replaced by the following:

‘Article 13a

Amendments to legacy contracts for the purpose of the implementation of benchmark reforms

1. Counterparties may continue to apply the risk-management procedures referred to in Article 11(3) that they have in place on 13 February 2021 in respect of OTC derivative contracts which are not cleared by a CCP and that are entered into or novated before the date on which the obligation to have risk-management procedures in place pursuant to Article 11(3) takes effect where, after 13 February 2021, those contracts are subsequently amended or novated for the sole purpose of replacing a reference benchmark or introducing a fallback provision in relation to any benchmark referenced in that contract.

2. Contracts which are entered into or novated before the date on which the clearing obligation takes effect pursuant to Article 4 and which, after 13 February 2021, are subsequently amended or novated for the sole purpose of replacing a reference benchmark or introducing a fallback provision in relation to any benchmark referenced in that contract, shall not, for that reason, become subject to the clearing obligation referred to in Article 4.

3. Paragraphs 1 and 2 shall apply only to OTC derivative contracts the amendment or novation of which:

(a)	is necessary for the purpose of replacing a benchmark in the context of benchmark reforms;

(b)	does not change the economic substance or risk factor represented by the reference to a benchmark in such contract; and

(c)	does not encompass other changes to any legal term of that contract that does not relate to the benchmark referenced and thus potentially amends the contract in a way that effectively requires it to be considered a new contract.’.

Article 3

This Regulation shall enter into force on the day following that of its publication in the Official Journal of the European Union.

It shall apply from the day following that of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

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Contents

Article 1 - Amendments to Regulation (EU) 2016/1011

Article 2 - Amendment to Regulation (EU) No 648/2012

Article 3