On 25 November 2020, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM) published a report titled ‘The transition to alternative benchmark rates’ (the Report).

The Report is a feedback report setting out the main findings resulting from an information request made by the AFM and the Dutch Central Bank (De Nederlandsche Bank, DNB) to a selection of Dutch banks, pension funds, insurers and asset managers. According to the Report the main findings are as follows:

  • Interest-rate benchmarks are widely used throughout the entire product chain of financial institutions, most notably in interest-rate derivatives. Of all interest-rate benchmarks, EURIBOR is the most frequently used.
  • For most products that were considered, the median institution references an alternative benchmark for most of its outstanding contracts.
  • Most of the contracts linked to alternative benchmarks reference EURIBOR, with the share of contracts referring to risk-free rates being limited.
  • With respect to jurisdictions other than the EU, the vast majority of contracts still reference IBOR benchmarks.
  • Most IBOR-based contracts, those referring to EONIA being an exception, have a remaining maturity beyond 2022 and will as a result need to be amended to reference alternative rates or be provided with a fallback option by 1 January 2022 at the latest.
  • A large number of contracts, including those referencing EURIBOR, do not yet include a fallback provision. Moreover, not all newly issued contracts contain appropriate fallback language. Institutions indicate that inserting or updating fallback language in outstanding contracts generally remains challenging. Several market participants are still awaiting international industry protocols before amending outstanding contracts to integrate fallbacks.
  • Many institutions state that they nevertheless have started work on including fallbacks where possible and appropriate for certain client groups. Contracts outstanding with non-financial and/or non-professional counterparties, such as mortgages and loans, more frequently include a fallback provision than other types of contracts.
  • Not all respondents have started communicating with clients holding contracts that will have to be repapered (i.e. those referencing IBORs or EURIBOR). Those that have commenced their communication provide information proactively on dedicated webpages or via letters and emails. Institutions that have not yet informed clients do not meet this best practice.
  • Respondents to the information request selected operational and legal risk as the most important risk categories, followed closely by financial risk. Generally, the outlook was optimistic and overall risks were seen to be decreasing.
  • In terms of risk mitigation, most of the respondents have set up a centralised project team to manage the IBOR transition. Institutions that have not yet established a centralised project team do not meet this best practice. Other forms of mitigation include adhering to the ISDA Benchmarks Supplement Protocol, modifying documentation, and implementing fallback clauses in documentation.

In addition to these main findings, the Report also contains an overview of recent developments that are relevant to the IBOR transition, including the evolution of the liquidity of the designated risk-free rates, industry initiatives, and overall developments relating to the major currency areas.

The AFM and DNB considered the following interest-rate benchmarks have been in the analysis. Benchmarks are classified as either ‘IBOR’ or ‘alternative’. All alternative benchmarks save EURIBOR are considered risk-free.

Jurisdiction IBOR (fallback required) Alternative benchmark

EURIBOR (fallback required)

Switzerland CHF LIBOR SARON (fallback required)

The AFM notes on its website that despite the fact that many contracts are now based on future-proof benchmarks (e.g. EURIBOR), important issues still remain, such as the inclusion of fallback provisions in financial contracts should the benchmark in use disappear. According to the AFM market parties are struggling to adopt adequate fallback provisions and are waiting for standards from working groups (e.g. the Working Group on EU Risk-Free Rates) or international industry organisations. The AFM and DNB believe that market parties should also take initiative in this respect.