Today the German Banking Association (Bundesverband deutscher Banken – BdB) published its Supplementary Agreement for IBOR succession (Zusatzvereinbarung für IBOR-Nachfolgeregelung (IBOR-Zusatzvereinbarung)), a template agreement for the transition away from LIBOR under the German Master Agreement for Financial Derivatives Transactions (Deutscher Rahmenvertrag für Finanztermingeschäfte – DRV). The DRV is not covered by the ISDA 2020 IBOR
Patrick Scholl is a partner and head of Mayer Brown's Banking & Finance practice in Frankfurt. Patrick leads the Mayer Brown capital markets and derivatives offering in Germany with an European focus. His team advises on debt capital markets issuances and disclosures, debt issuance programms, hybrid capital instruments as well as liability management transactions. The OTC derivatives practice focuses on advising and negotiating master agreements (including repos and stock lending), collateral solutions, netting questions and provides transaction support with regard to all underylings, including equity-linked, credit-linked, fund-linked or commodity-linked derivatives.
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Following the discussion and status set out in our September 2020 blog post, Proposal for a Governmental IBOR Transition in the European Union, the proposed amendment to the EU Benchmark Regulation (“BMR”) has been developed further and a consolidated version published reflecting the text agreed by the Council of the European Union and the European Parliament.
Continue Reading Update on the Proposal for a Governmental IBOR Transition in the European Union
Following the implementation of the EU Benchmark Regulation (“BMR”), the Euro Interbank Offered Rate (“EURIBOR”) was modified to a hybrid methodology that relies on a three-level waterfall that prioritises the use of real transaction data when available from a group of 18 quoting European banks. As a result, EURIBOR is considered compliant under the BMR, and its administrator, the European Money Markets Institute (“EMMI”), is authorized and registered under Article 34 of the BMR. Therefore, the use of EURIBOR is expected to continue, subject to periodic reassessment in accordance with the BMR, and the financial and capital markets do not need to transition to a replacement benchmark, as is the case with many other IBORs.
Nonetheless, in January 2019 and November 2019 the Working Group on Euro Risk-Free Rates (“Euro Working Group”) published general principles and recommendations to the market with respect to the inclusion of fallback provisions in contracts that reference EURIBOR, to mitigate the risks of a temporary or permanent cessation and to make these contracts future proof. This action was in line BMR requirements that EU supervised entities provide robust written plans to address the unavailability of benchmarks including EURIBOR and implement such plans in new contracts.
The German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte – the “DRV”) is published by the German Banking Association (Bankenverband) and can be considered the German law equivalent of the ISDA Master Agreement. Like the ISDA Master Agreement, standardised Annexes are used to document specific provisions, for example special early termination provisions, as well as to document the posting of collateral, which is done via the Collateral Addendum (Besicherungsanhang – the “BSA”), including the Variation Margin and Initial Margin BSA.
The Benchmark Regulation (“BMR”) came into force in 2016 and applies since 1 January 2018. It aims to regulate benchmarks, including interest rate benchmarks such as London Interbank Offered Rate (“LIBOR”), used in the EU in order to make such benchmarks more reliable. For this purpose, the Benchmark Regulation introduced licensing and registration requirements but also obligations for users of benchmarks to deal with, and provide for plans in case of, interruptions or cessations of benchmarks. The BMR, however, does not give supervising authorities the right to directly amend financial instruments or contracts if the parties to it are unable to replace a benchmark for whatever reason. So any of these plans are subject to civil law requirements and restrictions applicable to a financial instrument or contract under its governing law.
Continue Reading Proposal for a Governmental IBOR Transition in the European Union