On 6 November 2019, the European Central Banks’s (ECB) working group on euro risk-free rates issued high level recommendations for fallback provisions in contracts referencing EURIBOR.

The working group notes that historically, contractual fallback provisions generally only contemplate the temporary unavailability of EURIBOR and do not address its permanent cessation and/or any differences between EURIBOR and any applicable replacement rate. As a result, current legacy fallback language may not produce a commercially fair result, as it may affect the pricing and performance of the product in the event of the permanent cessation of EURIBOR.

Among other things the working group recommends that market participants incorporate fallback provisions in all new financial instruments and contracts referencing EURIBOR, regardless of whether they fall within the scope of the EU Benchmarks Regulation (BMR). Legacy financial instruments and contracts referencing EURIBOR that were entered into after 1 January 2018 and that fall within the scope of the BMR should be covered by “robust written plans” prepared by supervised entities in accordance with Article 28(2) of the BMR.

For legacy contracts which do not contain appropriately worded fallback provisions, to the extent practicable, market participants should introduce EURIBOR fallback provisions, or enhance existing provisions, when such financial instruments and contracts are next amended or updated. Where no specific fallback provisions are recommended and pending further guidance from the working group or regulatory authorities, market participants may wish to consider including generic language in their fallback provisions. To this end, the working group is recommending a standard text for a generic EURIBOR fallback provision.