Benchmark reform : Year end 2021: a decisive milestone for the replacement of LIBOR and EONIA
As of December 31, 2021, these benchmarks (including USD LIBOR except for specific cases defined by the authorities) will no longer be used for new contracts or for legacy LIBOR contracts (except USD LIBOR).
In the interest of its customers and in line with the recommendations of the local authorities and market working groups, the Crédit Agricole Group has been preparing these transitions for several years, encouraging new contracts to switch to alternative rates, while ensuring the proactive and gradual transition of legacy contracts to new benchmark rates as early as possible.
1 - Reminder: what is the benchmark transition ?
For information about the background to the reform of benchmarks and an explanation of the main concepts, please refer to the report published on the Crédit Agricole Group website on 8 October 2019.
The "benchmark reform" refers to all actions taken by the private sector as well as the initiatives of authorities around the world to implement the replacement of certain widely used benchmarks, particularly in fixed income markets. This reform results in particular in the replacement of LIBOR and EONIA benchmarks, but other benchmarks in numerous locations are also affected. These benchmarks, considered fragile, could, if they were not replaced, adversely affect the integrity and stability of financial markets and costumers’ protection.
On March 5, 2021, the UK Financial Conduct Authority (FCA) confirmed that immediately after December 31, 2021, EUR, CHF, JPY and GBP LIBOR benchmarks (and USD LIBOR 1-week and 2-month settings) will no longer be representative and will cease to be published. Publication of the other USD LIBOR settings will cease immediately after 30 June 2023.
Replacement benchmarks have been developed over the past few years. Most of them are calculated using the overnight Risk-Free Rates (RFR).
Lastly, for the replacement of EONIA, the ECB EUR Working Group has designated the €STR as the new monetary reference rate for the Eurozone. EONIA will disappear after its last publication dated January 3, 2022.
2 - What are the different options for transitioning new and legacy contracts referencing benchmarks that are discontinued ?
For an explanation of the detailed strategy adopted by the Group, please refer to the report published on the Crédit Agricole Group website on 23 March 2021.
2-1 What is the impact for new contracts and transactions referencing variable rates ?
In accordance with recommendations from national working groups and competent authorities, the Crédit Agricole Group has gradually ceased to use these benchmarks according to milestones defined by currency and asset class.
From December 31, 2021, all new variable-rate transactions will be carried out on the basis of the alternative rates, mainly RFR, barring exceptions defined by the authorities for USD LIBOR. The USD LIBOR settings (except 1-week and 2-month) on the one hand and the “synthetic” GBP and JPY LIBOR settings on the other hand will continue to be published for limited use in line with the directives and timelines defined by the authorities. The USD LIBOR settings (Overnight, 1-month, 3-month, 6-month and 12-month) will be published until June 30, 2023, while the synthetic JPY LIBOR settings (1-month, 3-month and 6-month) will cease to be published after 2022 and the synthetic GBP LIBOR settings (1-month, 3-month and 6-month) will be published until December 31, 2022 and may be published for a maximum period of ten years after December 31, 2021, subject to an annual review of the situation by the UK authorities.
With the support of national working groups, the private sector has defined different term structures based on RFR, as well as different rates conventions. This allows all players to implement the contractual and operational replacement of reference rates.
2-2 What is the impact on legacy contracts ?
All legacy contracts - barring rare exceptions -have transitioned or will have to transition according to one of the following options :
With the aim of ensuring predictability and minimising risks, the Crédit Agricole Group has wherever possible given preference to proactive transitions in anticipation of the cessation of benchmarks, by offering its customers an alternative solution.
This consists in moving to an alternative rate before the original benchmark ceases to be published.
Depending on asset classes and currencies, the formalisation - between the parties to the contract - of the replacement of the benchmark could take different forms, including signing an amendment to the contract or sending an information letter notifying the customer of the replacement of the benchmark with a notice period allowing customer to challenge the proposal.
However, this proactive option may sometimes be impossible for certain contracts, asset classes and currencies, for several reasons, in particular :
- In some cases, the late emergence of market standards on replacement rates and rates conventions.
- The very gradual development of the liquidity of the markets referencing alternative rates.
- An uneven level of preparation among different players
- The significant volume of contracts that do not allow for renegotiation via the signature of an amendment
If the proactive transition is not possible, transitions will take place using one of the following legal or legislative solutions :
Transition via fallback provisions
If a robust fallback has initially been included in a contract or can be added before the benchmark ceases to be published, the triggering of the fallback will switch the contract to the alternative benchmark when the replaced benchmark is no longer published or becomes non representative.
In some cases, fallbacks are a provision to trigger an exchange between parties to define the replacement rate as the date of cessation or non-representativeness of the initial benchmark approaches.
Transition supported by legislative solutions
The authorities, particularly in the UK and Europe, have decided to implement dedicated legislative measures to facilitate the transition of contracts that could not have been transitioned pro-actively or by the activation of fallback provisions at the date of non-representativeness or cessation of publication of systemically important benchmarks, such as LIBOR.
These measures were called by market participants in order to prevent any complex transition situation, in particular legal uncertainty. They are considered as last resort solutions.
They can take different forms depending on the jurisdiction :
- In the United Kingdom: a scheme based on a temporary replacement rate allowing for the maintenance of LIBOR by using a "synthetic LIBOR" for a limited period of time (which may not extend beyond the term of the contracts). It will apply to the GBP LIBOR and the JPY LIBOR.
- In the European Union: a replacement based on the transition to a statutory reference rate designated by the authorities. The transition will then be definitive, regardless of the maturity of the contracts. It will apply to EONIA and to CHF LIBOR. Its possible application to GBP LIBOR and JPY LIBOR is not yet decided.
3 - You still have contracts/transactions referencing benchmarks that will no longer be representative or will cease to be published on December 31, 2021: what are the next steps ?
If the proactive transition of your LIBOR (excluding USD) and/or EONIA contracts is not possible, the fallback provisions in your contracts, if such provisions exist, will be triggered upon the occurrence of the event of "non-representativeness or cessation of the publication of the benchmark". If the contracts do not contain these provisions, or if the existing provisions do not allow for a transition, then they could benefit from legislative schemes according to the applicable law.
Exceptional situations that do not fall under any of the above-mentioned transition scenarios will be handled on a case-by-case basis.
If you have contracts referencing USD LIBOR, the transition period is longer than the one for other LIBOR currencies, since its cessation will only occur at end June 2023 for main settings. It is expected that market participants will accelerate their transitions of USD LIBOR legacy contracts in 2022. It is important to note that certain transactions triggered after 2021 and falling under contracts signed before 2022 may be considered as “new use” and consequently should no longer use the USD LIBOR. Finally, the implementation of a US legislative solution to support transition of contracts governed by US laws – designating a permanent replacement rate - is under consideration at the federal level. In the UK, the opportunity to publish a synthetic USD LIBOR will be considered at a later stage by the LIBOR administrator.
With regard to the EURO, unlike the EONIA, which will be published for the last time on January 3, 2022 and which will then be totally replaced by the €STR, EURIBOR is currently not the subject of an effective transition. This benchmark is also subject to the BMR regulation and, as such, its use implies in particular that any contract referencing it and falling within the scope of BMR must incorporate robust fallback provisions in case EURIBOR becomes non-representative or ceases to be published in the future.
In this context of benchmarks transitions, your Crédit Agricole correspondent will continue to update you regarding the organisation of the transition of your contracts signed with one of the Group's entities and is available to answer any additional questions you may have.