Global Financial Institutions Coverage

5 9 EU PROPOSED STATUTORY REPLACEMENT RATE The European Commission has proposed legislative amendments 5 to the EU Benchmark Regulation ("BMR") that would grant it the power to designate a statutory replacement rate to replace a benchmark in cessation where one party to the party is an EU supervised entity, such as authorized banks, investment firms, insurance undertakings and fund managers (i.e., the power covers contracts covered by the BMR). It would be mandatory for the EU replacement rate to be used where: (i) the contract does not include any fallback provision to cover a permanent cessation; (ii) the contract doesn't include any fallback provisions; and (iii) the fallback included in a contract is to a benchmark that has ceased or is ceasing. Parties to a legacy contract that have re-negotiated the reference to the benchmark and selected another replacement rate may mutually agree to opt out of using the EU replacement rate. The power could be exercised regardless of where the benchmark is authorized or published. The designation of the replacement rate would only apply to contracts pending at the time the designation entered into force—the Commission will exercise its powers by adopting an implementing act. The Commission is proposing that any one of the below events would trigger the EU statutory replacement rate: 1. a public statement by or on behalf of the administrator of a benchmark announcing that the administrator has ceased or will cease to provide the benchmark permanently; 2. a public statement by the benchmark administrator's regulator declaring that the administrator of a benchmark has ceased or will cease to provide the benchmark permanently; or 3. a public statement by the benchmark administrator's regulator stating that the benchmark is no longer representative of an underlying market or economic reality on a permanent and irremediable basis. For contracts out of scope, the Commission is proposing to include an option to elect to replace the ceasing benchmark with the EU statutory replacement rate. The Commission also intends to issue a formal recommendation that each EU Member State should adopt national laws mandating the use of the EU statutory replacement rate for contracts governed by the law of the relevant Member State. The Commission's proposal must be approved by the European Parliament and Council before it can enter into force. If the amendments to the EU BMR enter into force before December 31, 2020 (the end of the Brexit transitional period), those amendments will be directly applicable in the UK until the end of the Brexit transitional period. 5. Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation (COM(2020) 337 final), July 24, 2020. The three principal legislative solutions are not uniform and the prospect of all of them being adopted is far from certain.

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