IBOR TRANSITION – A global benchmark transition: the international interbank offering rate markets have been experiencing unprecedented developments during the past two years, and there is yet more to come. As a result of the LIBOR scandal, central banks and benchmark supervisors in the major world currencies began a transition from their overnight benchmarks as early as 2017. The new benchmarks selected should offer more guarantees in terms of robustness, and should be less prone to manipulation by reflecting real transactions.

IBOR TRANSITION AND EUROPEAN CALENDAR IMPERATIVES

This transition to new benchmarks has been gradual since 2017, with most O/N rates that already came into effect on the world’s major jurisdictions. The European Union is an exception, as the transition to the new benchmarks is not yet effective. This transition coupled with the entry into force of the BMR is a double challenge for European banks. Indeed, the current benchmarks on O/N and term rates (EONIA and EURIBOR) will no longer comply in their current form to the BMR as of 1 January 2020, thus putting increased pressure on the European players (regulators and banks) regarding the transition scenario at the end of 2019

This pressure is even stronger that the new overnight RFR rate – the ESTER – in compliance with the BMR, will be published by the ECB only from October 2019. Similarly, the reformed term rate (the EURIBOR Hybrid) is still in testing phase and should be compliant with the BMR only mid-2019.

In addition, facing the growing uncertainty regarding the status of the benchmarks adopted on 1 January 2020, several associations (and in particular the ISDA, GFMA, FIA and EMTA) have requested the European regulator a 2- year extension of the transition period for the entry into force of BMR on critical benchmarks. This transition period would be consistent with benchmarks transition in other jurisdictions.

This extension of the transitional period would allow, in the event that some banks are not ready by 1 January 2020, to continue to use EONIA and EURIBOR in their current form and to start a pace transition of their activity towards new benchmarks. These associations also highlight the fact that with the extension of the validity of the current benchmarks, a large number of contracts will expire before the discontinuation of those rates. In addition, this extension will limit the tensions of the interest rate market liquidity at the end of 2019 and will allow more time for banks and regulators to prepare the transition.

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