On 25 September 2019, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) and the Dutch Central Bank (De Nederlandsche Bank, DNB) published their findings and best practices on the transitioning to alternative benchmarks.
The transitioning to alternative benchmarks follows from the EU Benchmarks Regulation (BMR). The AFM and DNB require the users of interest rate benchmarks to prepare properly. In April 2019, the AFM and DNB sent out a questionnaire to the CEO’s of the management boards of large financial institutions. They wanted to get insight in, among other things, the use of interest rate benchmarks, identified risks associated with the transition to alternative benchmarks, and the steps financial institutions have taken and intended to take to prepare for the transition (please see our previous blog post for more details).
On the basis of the responses to this questionnaire, the AFM and DNB have compiled the following findings and best practices:
- Use of interest rate benchmarks: The use of benchmarks is diverse and benchmarks are relevant to many aspects of respondents’ businesses. The best practice is to have a detailed and complete overview of the use of benchmarks in the entire organisation, as well as the term of the use of each benchmark.
- Identification of alternatives: Not all respondents have yet identified alternative benchmarks. The best practice is to identify alternative benchmarks, to allocate them to specific product types and to use them where possible.
- Identification of risks in relation to the transition: Respondents recognize the necessary risks around the transition. Operational and legal risks are experienced as high risks. Also mentioned are financial economical risks, risks in relation to client relationships and risks in relation to timing and outcome of the transition.
- Transition method: All respondents have compiled or shortly will compile an internal project team. The best practice is to compile a centrally organized project team that oversees all benchmarks related activities of the institution that will report to the board. It will also have to be ensured that the planning of this team is in line with the timing of the transition. Well prepared organisations currently already take the transition into account in new contracts.
- Scenarios: The degree in which respondents take scenarios into account to deliver input on the planning is diverse. Scenario planning is very useful, in particular because of the uncertainty of the transition. The best practice is to have identified different scenarios and use these for input on the planning.
- Obstacles: The main obstacles mentioned by respondents are uncertainty about outcomes and timing.
- External advice: Most respondents make use of external advisors. Respondents also make use of market events such as round tables to gain knowledge. A best practice is to participate in such initiatives and to participate actively in consultations and questionnaires.
- Information provision to clients: Due to the uncertainty of the transition and the impact thereof on the different types of clients, in general, institutions are reluctant to already inform clients. The best practice is to have a communication plan and where possible communicate to their clients.
View the findings and best practices (Dutch only), 25 September 2019.