On 19 November 2021, the CSSF published Press Release 21/28 addressed to undertakings for collective investment (“UCIs”) and investment fund managers (“IFMs”) in the context of the imminent cessation of the widely used interest benchmarks EONIA and LIBOR.
The Press Release is a reminder of the actions that UCIs and IFMs shall have put in place in the context of the cessation of both benchmarks and also inform about the new designated replacement benchmarks in case no replacement has been set in the fallback provisions.
EONIA has been discontinued since 3 January 2022 and is no longer published by its administrator European Money Markets Institute (“EMMI”). Therefore, UCIs and IFMs are no longer authorised to use this benchmark, for instance as a basis of the calculation of a performance fee or to determine the interest rate applicable to a contract, and shall use the replacement benchmark designated in their fall back provision in lieu of EONIA.
Where no replacement benchmark to EONIA has been provided in the fall back provision, the Commission Implementing Regulation (EU) 2021/1848 of 21 October 2021 on the designation of a replacement for the benchmark Euro overnight index average (the “EONIA Implementing Regulation”), which applies as of 3 January 2022, has designated the €STR as the replacement benchmark to EONIA. The €STR will apply in lieu of EONIA in any contract and in any financial instrument in case such contracts or instruments do not contain fallback provisions or suitable fallback provisions in relation to the replacement of EONIA.
The €STR is published by the European Central Bank since 2 October 2019.
Regarding LIBOR, the CSSF reminded in its communication that all 35 settings of the LIBOR benchmark will cease to be provided by any administrator or will no longer be representative according to the following schedule:
- immediately after 31 December 2021, in the case of all GBP, EUR, CHF and JPY settings, and the 1-week and 2-month USD settings; and
- immediately after 30 June 2023, in the case of the remaining USD settings.
Regarding the 1-, 3- and 6-month GBP and JPY LIBOR settings, the UK Financial Conduct Authority (“FCA”) required the Libor administrator to publish these settings under a “synthetic” methodology, based on term risk-free rates, for the duration of 2022 in order to avoid disruption to legacy contracts that reference it. In this respect the CSSF reminded UCIs and IFMs that such settings of the LIBOR can be used:
- for the duration of 2022, and
- after 2022, only in legacy contracts and are not for use in new business.
As for the LIBOR CHF settings, where no replacement benchmark has been provided in the fall back provision, SARON settings have been designated in the Commission Implementing Regulation 2021/1847 of 14 October 2021 as a replacement for the CHF LIBOR, as of 1 January 2022. The relevant SARON settings will apply in lieu of the relevant LIBOR CHF settings in any contract and in any financial instrument in case such contracts or instruments do not contain fallback provisions or suitable fallback provisions in relation to the replacement of LIBOR CHF.
In terms of a viable replacement for the LIBOR GBP settings, two different recommendations were issued: SONIA and SOFR. However, those replacements rates are only a recommendation and it is not yet certain whether the European Commission will use its power to designate replacement benchmarks with respect to those settings and/or to the JPY one, similar to what it did for CHF and for EONIA. Therefore, UCIs and IFMs are strongly encouraged by the CSSF to actively reduce their exposure to such LIBOR settings and not to wait for the European Commission to designate a replacement for the abovementioned LIBOR settings.
In case EURIBOR is used as a reference rate by UCIs and IFMs, the CSSF has drawn the attention of markets participants to the publications of the Euro Risk Free Rate Working Group as of 11 May 2021 with respect to EURIBOR fallback trigger events and €STR-based EURIBOR fallback rates.