Intesa Sanpaolo as Euribor Contributor

and the Transition to the Risk-Free Rates

Remote Learning
September 2021
INDEX
1

PART I BENCHMARK REGULATION

PART II ISP AS CONTRIBUTOR

EURIBOR

€STR

LIBOR TRANSITION
PART III
EURO RISK-FREE RATES WORKING GROUP
 2

PART II

ISP AS CONTRIBUTOR

EURIBOR

€STR

Gianfranco Marin
Fabrizio Tallei
Group Treasury – Euro Money Market
 3

Intesa Sanpaolo As Contributor

Who and Where
 4
Intesa Sanpaolo As Contributor
Roles and Functions

HEAD OFFICE - Euro Money Market Desk

• Submitters
• Approvers

Other Desks and Departments involved:

• Supporto Tesoreria - Product Control
• D.C. Rischi Finanziari e di Mercato
• D.C. Compliance Retail e Corporate Banking
• Audit Tesoreria e Banking Book
• Direzione Centrale Sistemi Informativi
• D.C. Operations Finanza
• Governo e Sviluppo dei Processi
• Cybersecurity Business Continuity Management
• Direzione Controlli e Reclami
• DC Legale e Contenzioso
Intesa Sanpaolo As Contributor
5

Euribor Governance Framework – The Pillars

1- The Governance Code of Conduct

2- The Code of Obligations of Panel Banks

3- The Benchmark Determination Methodology

4- The Code of Obligations of Calculation Agent

Intesa Sanpaolo As Contributor
6

Code of Obligations of Panel Banks

Panel banks must adhere to specific requests of the Administrator

regarding:

❑ Governance
❑ Internal Oversight and Verification Procedures (Internal and External)
❑ Roles and Responsibilities
❑ Conflict of Interest Policies, Individuation and Mitigation
❑ Contribution Methodology
❑ Input Data Policy
❑ Transmission Data Policy
❑ Record-Keeping Policy
❑ Ethical Standards & Whistleblowing Policy
❑ Complaint Procedures
 7
Intesa Sanpaolo As Contributor
Code of Obligations of Panel Banks
Product Control shall:

• on a quarterly basis, produce a report with the analysis of the final Intesa Sanpaolo contributions to the
Euribor (therefore including the level 1 and 2 rates calculated by EMMI and the level 3 rates);
• on a quarterly basis, produce a graph of the final Intesa Sanpaolo contributions (including the level 1 and 2
rates calculated by EMMI) and the final Euribor fixings, putting evidence on the trends of the two curves;
• on a quarterly basis, perform a trend analysis with focus on the coherence between the transactions’ rates
and the internal short-term cost of funds pricing used for level 3 contribution.

Financial and Market Risk Department shall:

• produce quarterly monitoring reports on the correlation between Euribor floating interest rates positions and
Euribor contributions at group level for both banking and trading books;
On a quarterly basis, the Department makes an ex-post control report to identify the correlation (if any)
between the trend of the contribution and the positions of the desk whose portfolios are linked to Euribor;

• annually report to the Group Risk Financial Risk Committee on the outcomes of the control activities;

• analyze and approve – at least annually – the Level 3 methodology, based on statistical investigations, back-
testing and comparisons related to Intesa Sanpaolo own transactional data, submitted rates, other panel
bank available data, available current market data (both cash and derivatives) and official fixing quotes.

Projects and Information Security Desk shall:

• conduct an internal review of the security certification of the IT systems supporting the Euribor rate
submission process with the purpose to obtain the self-certification ISO 27001 .
 8
Intesa Sanpaolo As Contributor
Code of Obligations of Panel Banks

Compliance Department shall:

• Perform an annual control concerning the observance of the principles established by COPB
On an annual basis, the Compliance Department shall prove compliance with the principles established by
the COPB, in terms of communications monitoring (email, exchanges through electronic messaging, phone
calls), in order to verify the absence of undue influence on the contribution.

• Report to the Management Board annually on the outcomes of the review activities

• Report to the Management Board in case of complaints and anonymous reporting on suspicious
contributions/behaviors

• On a timely basis, report to EMMI any material issues arising from the reviews, including material findings from
the internal and external audits.
External Audit shall:

• Perform inspection activities

At least every two years and in alternation with ISP internal
audit, the firm’s external auditors shall carry out an audit and
validation of Policies, procedures and processes for the
contribution
Internal Auditing Department shall:

• Perform control activities. Every two years, in alternation

with the external audit, the Internal Auditing Department
shall carry out controls and validations of Policies,
procedures and processes for the contributions to the
Euribor rates.
Intesa Sanpaolo As Contributor
9

Euribor Governance Framework – The Administrator

The European Money Markets Institute is an international non-for-profit association under Belgian law,
founded in 1999 – along with the introduction of the euro. Based in Brussels, its members are national banking
associations in the Member States of the European Union.
 10

Euribor – Who Contributes?

The Panel
In comparison with the number of banks contributing to the Euribor at its inception in 1998
(around 50), it is absolutely evident the decrease in the participation rate. However, it must be
said that the merge and acquisition trend of the last 20 years in the banking system has played
a fundamental role in the phenomenon of the shrinking number of the panel.

The current panel includes 18 active banks:

Euribor – Definition
11

Evolution and Strengthening of the Definition

Old definition: «Euribor is the rate at which Euro interbank term deposits are offered by one
prime bank to another prime bank within the EMU zone and is calculated at 11.00 am (CET)
for spot value (T+2).

With the aim of better aligning the benchmark and its substance to the developments of the
financial markets and following the consequent regulatory requests, in 2019 EMMI has
finalized some important improvements.
Particular importance was given to the strengthening of the Euribor definition that now
includes two fundamental components:

- the Underlying Interest

- the Determination Methodology (BDM)

CURRENT DEFINITION: EMMI states the Underlying Interest for EURIBOR as “the
rate at which wholesale funds in euro could be obtained by credit institutions in
the EU and EFTA countries in the unsecured money market”.
Euribor – «Hybrid» Methodology
12

Benchmark Determination Methodology

The Euribor must be anchored to the actual transactions of the Panel Banks as
much as possible. Actual transactions’ rates are used directly and indirectly by the
Calculation Agent to obtain all panel banks’ single contribution strings.

Following a waterfall methodology, when no rates could be derived form direct or

indirect use of the available transactions, EMMI requests the single panel banks to
provide a level 3 contribution rate based on a specific and (bilaterally) approved
methodology.

! Only five tenors are currently published: 1 week, 1 month, 3 months, 6 months, 1 year !
Euribor – «Hybrid» Methodology
13

Benchmark Determination Methodology

Trimming: for each tenor the Calculation Agent discards the 15% higher and 15%
lower rates obtained from each single Panel banks. The arithmetic mean is
calculated on the remaining 70%, rounded to the third decimal with the «half away
from zero» convention.

Some contingency provisions could be applied on the single tenors in case of:

- delays/impossibility to contribute for a relevant number (50%)of panel banks

- concentration of the contribution from only three countries
- further pre-calculations checks are necessary to avoid including potential
errors signaled by the panel banks on their data

RE-FIXING POLICY: if relevant errors (>2BP) are detected in time, the Calculation
Agent has the right to modify the published rates, but no later than 3 pm CET.
Euribor – «Hybrid» Methodology
14

Level 1 Methodology (EMMI)

! Starting from 19 April 2021, EMMI has lowered the minimum threshold to consider a transaction
eligible for level 1 from 20€/mln to 10€/mln. Moreover, in addition to the T,T+1,T+2 start value date
conventions, also the transactions with start value date T+3 are now eligible !
 15
Euribor – «Hybrid» Methodology
Level 2.1 Methodology (EMMI)
 16
Euribor – «Hybrid» Methodology
Level 2.2 Methodology (EMMI)
Euribor – «Hybrid» Methodology
17

Level 2.3 Methodology (EMMI)

1W no application
1m-6m up to T-4
12m up to T-6
 18
Euribor – «Hybrid» Methodology
EMMI Waterfall Methodology
Euribor – «Hybrid» Methodology
19

The In-Scope Contribution Perimeter 1/3

Key elements:
- Leverage on the MMSR flow (ISP HO transactions and inclusion of the UK+ European
branches activities)
- Short-term paper activity not included in the MMSR reporting (Ireland and Luxembourg
subsidiaries)
Euribor – «Hybrid» Methodology
20

The In-Scope Contribution Perimeter 2/3

Transactions MUST be inserted in a correct and

timely fashion In the event of non-compliance, the ECB
and the competent NCB may initiate an infringement
procedure. Following that, sanctions can be imposed.
Euribor – «Hybrid» Methodology
21

The In-Scope Contribution Perimeter 3/3

Short-Term paper transactions MUST be communicated to HO in a
correct and timely fashion.
Every business day, an e-mail with the precise recap (excel file) of the short-term activity
of each subsidiary must be sent to the Head Office (EURO Money Market Desk).
Euribor – «Hybrid» Methodology»
22

The In-Scope Contribution Perimeter - MMSR Deep Dive 1/4

Euribor – «Hybrid» Methodology
23

The In-Scope Contribution Perimeter - MMSR Deep Dive 2/4

Euribor – «Hybrid» Methodology
24

The In-Scope Contribution Perimeter - MMSR Deep Dive 3/4

Euribor – «Hybrid» Methodology
25

The In-Scope Contribution Perimeter - MMSR Deep Dive 4/4

Euribor – «Hybrid» Methodology
26

Level 3 Contribution (ISP)

Transactions not included in levels 1-2 :
• ISP Ireland and Luxembourg Short-Term Paper Issuances
• Transactions excluded by EMMI due to the notional
threshold

Short-Term Cost of Fund Curve, obtained observing:

• ISP Liquidity Position (LCR)
• Italy Short-Term Government Bonds’ Yields
• ISP Secondary Market Yields
• Interbank Cash Unsecured Market
• Eurosystem Open Market Operations and Liquidity
Conditions
• Commercial Paper Market

Other data:
• Non-Financial Corporation Deals
• ISP Ratings
• Repo Market
• Fx Swaps
Euribor – «Hybrid» Methodology
27

Level 3 Methodology – The Dashboard

Euribor – «Hybrid» Methodology
28

Level 3 Methodology – The Contribution

Euribor – «Hybrid» Methodology
29

Level 3 Methodology – Reason Codes and Consistency Checks

 30
Euribor – «Hybrid» Methodology
The Contribution Process

EURO MONEY MARKET DESK

- (on day T) the front-office concludes and validates all the transactions in FCHUB’s blotter level 1-2. ISP Ireland and
Luxembourg send a recap of their short-term paper activity;

- (on day T+1before 08.30 CET) the transactions included in the MMSR unsecured package are sent to the
Calculation Agent. The Submitter receives a fully automatic flow (excel format) including all the details and verifies
that the transactions package corresponds to that one received by the Calculation Agent (activity performed
accessing EBASS site). The submitter must also check the transactions concluded via short-term paper issuances by
our Ireland and Luxembourg subsidiaries;

- (on day T+1 before 09.45 CET) the authorized Submitter sends the proposal of level 3 contribution;

- (on day T+1 before 09.45 CET) the Approver checks the proposal and authorizes the dispatch;

- (on day T+1 before 09.45 CET) the Submitter upload the contribution on FCHUB and, after having selected the
name of the Approver, sends the rates to the Calculation Agent;

- (on day T+1 before 11.00 CET) the Checker verifies that the rates sent are exactly those internally authorized.
 31
Euribor – «Hybrid» Methodology
The Contribution Process
OPERATIONS

- (on day T) check any single eligible deal with the details agreed with the counterparties;

- (on day T) check the payment matching and investigate in case of modified or cancelled deals;

- (on day T) check the success of automatic on-line quality checks active on each single deal;

- (on day T+1) check the coherence of Euribor eligible transactions and MMSR reporting.

OPERATIONAL SUPPORT AND INFORMATION FLOWS COORDINATION

- (on day T+1) verifies the correct evolution of the contribution’s process (“six eyes principle”).

PRODUCT CONTROL

- (on day T+1) receives a full representation of the input data;

- (on day T+1) performs the independent price verification.

 32
Euribor – Workflow
The Contribution Workflow
Euribor – «Hybrid» Methodology
33

FC HUB Mapping
Euribor – «Hybrid» Methodology
34

FC HUB Filters
Euribor – «Hybrid» Methodology
35

FC HUB Blotter Level 1-2

Euribor – «Hybrid» Methodology
36

FC HUB Level 3 Contribution Dispatch

 37
€STR – EURO SHORT-TERM RATE
Definition

€STR reflects wholesale euro unsecured overnight borrowing costs of

euro area banks.

Starting from October 2019, the ECB publishes the rate every TARGET2 calendar
working day. The rate is based on individual transactions concluded at market
rates the day before (reporting date T) with maturity date T+1 (therefore overnight
transactions).

€STR is based exclusively on borrowing transactions in euro concluded

by financial counterparties and reported to the ECB from MMSR
reporting banks.

€STR is calculated using O/N rates of all eligible transactions with no

minimum notional threshold and using a volume-weighted trimmed mean.

! Differently from Euribor, whose rates embed a credit component, €STR

reflects the wholesale cost of unsecured borrowing transactions in euro with
maturity overnight (almost risk-free).
 38
€STR – EURO SHORT-TERM RATE
Calculation Methodology
The volume-weighted trimmed mean is calculated by:

- ordering the transactions from the lowest to the highest rate;

- aggregating the transactions occurring at each rate level;

- removing the top and bottom 25% in volume terms;

- calculating the mean of the remaining 50% of the volume-weighted

distribution of rates, applying a pro-rata to use exactly the half of the total
eligible volumes.
 39
€STR – EURO SHORT-TERM RATE
Working Flow
 40
€STR – EURO SHORT-TERM RATE
Volumes and Rates
 41
€STR – EURO SHORT-TERM RATE
ECB Compounded Rates and Index
 42
€STR – EURO SHORT-TERM RATE
ECB Compounded Rates and Index
 43

PART III

LIBOR TRANSITION

EURO RISK-FREE RATES WORKING GROUP

Giulia Diletta Mascheroni

Group Treasury – Euro Money Market

M. Cristina Lege
Group Treasury – Money Market & Settlement
 44

Background on Libor
What is LIBOR and how is it calculated?
LIBOR is a series of interest rates intended to reflect banks’ average cost of short-term, wholesale unsecured borrowing and it is
used in many financial products.

Rates are determined daily by the LIBOR administrator, the ICE Benchmark Administration (IBA), for various currencies (USD, EUR,
GBP, CHF, JPY) and tenors (Overnight, 1w, 1m, 2m, 3m, 6m and 12m).

Why Libor needs to be replaced?

The transition of financial markets from Interbank Offered Rates (IBORs) to alternative risk-free rates (RFRs) gained traction in July
2017 when the UK Financial Conduct Authority announced they would no longer compel banks to contribute to LIBOR after 2021.

The underlying market that LIBOR is derived from is no longer used in any significant volume. Therefore, the submissions made by
banks to sustain the LIBOR rate are often based (at least in part) on expert judgement rather than actual transactions.

LIBOR funding market changes and new structural risks have caught the eye of regulators around the globe:
Basel III (NSFR): binding liquidity metrics limit the banks’ ability to use short-term unsecured funding
Manipulation: scandals have shaken the confidence in the process
Legal Risk: panel banks are concerned about legal scrutiny
Stability: IBORs spiked during the financial crisis as banks stopped lending
 45

Recent Events – FCA announcement

Definitive cessation of LIBOR
FCA has issued on 5th March 2021 the formal announcement for the definitive cessation of Libor
Permanent Cessation
31 December 2021:
All 7 EUR Libor fixings,
All 7 CHF Libor fixings,
Spot Next, 1-week, 2-month and 12-month JPY Libor fixings,
Overnight, 1-week, 2-month, and 12-month GBP Libor fixings,
1-week and 2 month USD Libor fixings
30 June 2023: Overnight, 1-month, 3-month, 6-month and 12-month USD Libor fixings

Loss of representativeness
The FCA will consult in Q2-2021 on whether to continue the following fixings on a synthetic basis and on which legacy
contracts they will be permitted to be used:
1-month, 3-month and 6-month GBP Libor for a further (not specified) period after end-2021
1-month, 3-month and 6-month JPY Libor after end-2021 for one additional year

Synthetic Libors are expected to be calculated as term Risk Free Rate (e.g. 3-month SONIA) plus a credit adjustment
Synthetic Libors are reserved for existing transactions and are expected to be allowed on tough legacy contracts only (e.g.
retail bonds with widespread distribution, complex structured products)
For 1-month, 3-month and 6-month synthetic USD Libor after the end of June 2023, the FCA will assess the case for a synthetic
USD Libor
LIBOR Transition 46

Cessation Timeline
ISDA From 31/12/2021 to From 31/12/2022 to From 30/06/2023 to
Spread* Until 31/12/2021 31/12/2022 30/06/2023 Date TBD** After Date TBD**
O/N 0.64

1W 3.84 Interpolation possible

1M 11.45

USD LIBOR 2M 18.46 Interpolation possible

3M 26.16

6M 42.83

12M 71.51

O/N -0.24

1W 1.68

1M 3.26

GBP LIBOR 2M 6.33

3M 11.93

6M 27.66

12M 46.44

O/N -1.84

1W -1.98

1M -2.92

JPY LIBOR 2M -0.45

3M 0.84

6M 5.51

12M 16.60

Source: FCA, Goldman Sachs

* Spread adjustment set on March 5th to compute fallback rates
** date after which a non-representative, synthetic LIBOR would no longer be published for USD and GBP
Published as a representative rate
Potentially published as a non-representative, synthetic rate (subject to consultation)
No longer published
LIBOR Transition 47

Cessation Timeline
ISDA Until From 31/12/2021 From 31/12/2022 to From 30/06/2023 to
Spread* 31/12/2021 to 31/12/2022 30/06/2023 Date TBD** After Date TBD**
O/N -5.51

1W -7.05

1M -5.71

CHF LIBOR 2M -2.31

3M 0.31

6M 7.41

12M 20.48

O/N 0.17

1W 2.43

1M 4.56

EUR LIBOR 2M 7.53

3M 9.62

6M 15.37

12M 29.93

Source: FCA, Goldman Sachs

* Spread adjustment set on March 5th to compute fallback rates
** date after which a non-representative, synthetic LIBOR would no longer be published for USD and GBP

Published as a representative rate

Potentially published as a non-representative, synthetic rate (subject to consultation)
No longer published
LIBOR Transition 48

Main Risk-Free Rates (RFRs) That Will Take Over the LIBOR
Risk-Free Rates peculiarity is the fact that those rates are based only on actual transactions with maturity overnight, concluded
over the money markets of different jurisdictions.
Recent developments have shown that the only liquid money market sector with sufficient volumes is the one represented by
very short-term maturities.
Being overnight transactions, the credit risk premium is considered almost non-existent (“Risk-Free”).
 49
LIBOR Transition
Fallback Mechanisms

Based on simple mathematical

calculation on the value of past
realized daily fixing of RFRs over
a given period of time

Methodology based on market

pricing of future expectations. Some
curves are already available, in the
future more Administrators will
formally take care of the
governance and the correct
representativeness of the various
fixings.
 50

LIBOR Transition
CAS Credit Adjustment Spread
The UK Financial Conduct Authority (FCA) on March 5th 2021 announced the official dates of the
LIBOR dismission.
Shortly after, ISDA officially defined the Credit Adjustment Spread “fixing procedure” under rules
and mechanisms already identified after various consultations (historical median over a 5-year
period).
LIBOR Transition
Forward Looking Alternatives to the USD Libor
Bloomberg Short-term Bank Yield Index
(BSBY)
Measures the average rate of the marginal
borrowing cost in USD senior unsecured wholesale
market paid by the major gloabl banks
IOSCO compliant
Includes a credit risk premium (of a systemic
bank)
Starting from Q3 2021, futures based on the BSBY
should be introduced by CME
American Interbank Offered Rate
(AMERIBOR)
Calculation based on O/N unsecured loans on
the AFX exchange
Includes a credit risk premium (mainly
representative of small regional banks)
51
CME Term SOFR
Rates based on SOFR futures
IOSCO compliant
Credit risk premium NOT included
Rates published by CME, selected as the
recommended Term SOFR Administrator by the
ARRC
Formally recommended as forward-looking rate
by ARRC for the USD Libor transition
US Dollar ICE Bank Yield Index (BYI)
Calculation based on wholesale and primary
unsecured transactions (funds exchanged
between big international banks)
Includes credit risk premium
Working Group on Euro Risk Free Rates – Structure and Aims

Source ECB website

Working Group on Euro Risk Free Rates - Evolutions

THE WORKING GROUP AT THE INCEPTION

The first phase in 2017
has covered all the
activities related to the
designation of €STR as
the new risk-free rate for
the euro zone.

The second and even more UPDATE OF THE WORKING GROUP STRUCTURE
challenging phase started
after the first €STR official
publication (2nd october
2019) to elaborate all the
consultations and
recommendations on
Euribor fallback. With this
aim the WG structure had
to be updated.
Working Group on Euro Risk Free Rates – Main Activities 1/2
Among the main activities of the working group is worth to mention:

DONE!
Recommendation of €STR as the european risk free rate

➢ Request to the European Commission in 2018 to postpone the go live of the BMR for the critical benchmarks until the end of
2021with 2 years of transitory period from 2019

➢ Lunch of public consultations in order to receive input from the industry on the choice of the new risk-free rate and the
related transition from Eonia to €STR – 2018/beginning 2019

➢ Publication of the Legal Action Plan – Jul 2019

➢ Publication of a Report on the Transition for cash and derivatives products – Aug 2019

➢ Letter to IASB on accountancy and hedging issues- Jun 2019 and other contacts in 2020

➢ Publication of a Report on Risk management impacts– Oct 2019

➢ Publication of a Report on accountancy impacts– Oct 2019

➢ Communication Plan for markets and customers - Sept/Oct 2019

➢ Two workshops hosted by ECB to inform the industry (Nov 2018 and Sept 2019)

➢ Designation of the National Ambassadors to facilitate the communication in each single European Country
Working Group on Euro Risk Free Rates – Main Activities 2/2

➢ Support to the creation of a liquid €STR market for cash and derivatives products– starting from Oct 2019

➢ Elaboration of the principles for a new term structure €STR based (forward looking and/or backward looking
methodologies) – Oct-Dec 2019

➢ Impact assessment on credit spread to be used to elaborate a new risk-free curve €STR based to be used as
Euribor – Dec 2019/Beginning 2020

➢ Publication of recommendations for a term structure €STR based – Dec 2019

➢ Launch of a request for interest for administrators of the €STR based term structure - Jun 2019 and proposal
received in the following months

➢ Publication of two public consultations to receive further input from the industry on legal and technical detail for
the definition of Euribor fallback (e.g. trigger events) for cash and derivatives products - Nov 2020

➢ Publication of final recommendations – May 2021

➢ New organization of the WG following the change of the Secretariat from ECB to ESMA from May 2021 (first
meeting Jul 2021) and enlargement of the WG in the next few months (starting from Oct 2021)
Working Group on Euro Risk Free Rates – Publications 1/3

Paper and slides for the

communications to customers
Working Group on Euro Risk Free Rates – Publications 2/3
Technical Recommendations (Eonia-€STR transition, Risk Management and
Accountancy)
Working Group on Euro Risk Free Rates – Publications 3/3
Legal Recommendations (fallbacks)
 59
Working group on Euro Risk Free Rates
Euribor Fallbacks – 2020 Public Consultations

11° May 2021

 60
Working Group on Euro Risk Free Rates
2021 Final Recommendations

https://www.ecb.europa.eu/press/pr/date/2021/ht
ml/ecb.pr210511~7cce4a1370.en.html
Slides prepared for the AMBASSADORS and PARTICIPANTS in the WORKING GROUP ON EURO RISK FREE RATES
by Workstream n.7 - Communication and Education | May 2021

Working group on euro risk-free rates

Recommendations on EURIBOR fallback trigger events

and €STR-based EURIBOR fallback rates
Use, purpose and scope of this presentation pack

For working group on euro risk-free rates ambassadors to engage with internal and external stakeholders
on the working group’s recommendations regarding EURIBOR fallback provisions
Use

To explain the key elements of recommendations on EURIBOR fallback trigger events and EURIBOR fallback
measures for cash products published by the working group on euro risk-free rates
Purpose

The presentation covers the following areas:

• Background
Scope
• Recommendations on EURIBOR fallback trigger events – proposals and questions
• Recommendations on EURIBOR fallback measures for cash products – proposals and questions

62
Background
Why does the market need EURIBOR fallback provisions?

63
Recommendations on EURIBOR fallback provisions

• EURIBOR is not scheduled to be discontinued.

• However, EURIBOR fallback provisions are required in order to (1) cover for a scenario in which the
benchmark will permanently cease; and (2) comply with IOSCO principles and BMR article 28 (2).

• As part of its mandate, with the aim of ensuring a smooth transition in case EURIBOR permanently ceases to
exist, the working group on euro risk-free rates published recommendations regarding:

1. EURIBOR fallback trigger events

2. EURIBOR fallback measures for cash products, i.e. €STR-based term structures and spread adjustment,
and market conventions

64
 The need for a EURIBOR fallback provision

What is a fallback provision? The BMR regulatory requirements

A fallback provision is a clause in a contract
that determines what rate parties should use in
the event that the initially agreed upon
benchmark rate (such as EURIBOR) is not
available.
Without a fallback, a party tied to a contract
could potentially dispute actions taken in
response to the unavailability of the referenced
benchmark rate.
The requirements for fallback provisions are laid out in
BMR article 28.2*
Supervised entities are required to:
• produce and maintain robust written plans setting out the actions they would take in the
event that a benchmark they are using materially changes or ceases to be provided. This
includes the nomination of alternative benchmark(s) that could be referenced to
substitute the benchmark no longer provided, where feasible and appropriate;
• provide their written plans, upon request, to the relevant competent authority;
• reflect the written plans in their contractual relationships with clients.

Robust fallback provisions reduce contract uncertainty and the risk of legal disputes in the event that the initially
agreed upon benchmark rate is no longer available

* ESMA has published a Q&A that provides guidance on the implementation of BMR article 28.2

65
 Fallback provisions and their main elements

Key elements of a fallback provision:

Fallback provisions are defined by three key elements which determine the application of, and the conditions applicable to, the provision:

Trigger event: defines events and the Fallback rate: identifies the Spread adjustment: if the new
future date the fallback will be applied alternative reference rate fallback rate provides an
on. Include events related to under a term structure economically different outcome to
• permanent cessation methodology the original rate, a spread is
• temporary non-availability • Forward-looking included to avoid or minimise the
• non-representativeness (pre-cessation). • Backward-looking transfer of value.

The WFG euro RFR released a set of recommendations covering these key elements of the fallback provisions:

Recommendations Recommendations Recommendations

on Euribor fallback trigger on €STR based Euribor for credit spread adjustment and
events fallback rates for cash conventions when using a €STR-
products1 based backward-looking term
structure methodology

1. The working group acknowledges the EURIBOR fallback measures for derivatives products that ISDA included in (1) the 2006 ISDA Definitions for new
transactions, and (2) the IBOR Fallbacks Protocol for legacy contracts, if market participants choose to adhere to it. Therefore, the working group’s
recommendations only include specific use cases for cash products.

66
Recommendations on
EURIBOR fallback
trigger events

67
 Recommendations on EURIBOR fallback Trigger event

trigger events

Objective General Recommendations

Define a generic set 1. Contracts referencing EURIBOR should include provisions covering trigger events related to
permanent cessation, temporary non-availability and non-representativeness (pre-cessation).
of potential events 2. Trigger events should be objectively drafted in precise terms and refer to events made
that would trigger publicly available by the regulatory supervisor of the EURIBOR administrator or the EURIBOR
administrator.
the activation of 3. The date from which the fallback rate would apply after one or more of the trigger events has
occurred should also be specified clearly in fallback provisions
EURIBOR fallbacks
4. Market participants should seek consistency and use the same trigger events for all asset
that market classes when developing and introducing fallback provisions in different financial instruments
and contracts referencing EURIBOR, to the extent possible and appropriate.
participants could
5. Market participants should consider at least those trigger events included in in Article 23b
consider to include in paragraph 2 of the Benchmarks Regulation that grant the European Commission the power to
designate one or more replacement rates under certain circumstances and upon occurrence
their contracts and of one of four trigger events.

financial instruments
referencing
EURIBOR.

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Recommendations on EURIBOR fallback Trigger event

trigger events
Permanent and pre cessation EURIBOR trigger event recommendations
Market participants are recommended to include as a trigger event…
• … an official public statement or publication of information by or on behalf of the regulatory supervisor of the EURIBOR administrator or the EURIBOR
administrator stating that said administrator has ceased or will cease to provide EURIBOR permanently or indefinitely provided that, at the time
of the statement or publication, there is no successor administrator that will continue to provide EURIBOR.
• … an official public statement by or on behalf of the supervisor of the EURIBOR administrator that, in its view, (i) EURIBOR is no longer
representative, or will no longer be representative of the underlying market it purports to measure as of a certain date, and (ii) such
representativeness will not be restored (as determined by such supervisor).

Market participants could consider whether it would be appropriate to include as a trigger an event…
• … in which use of EURIBOR has become, for any reason, unlawful for relevant parties to the agreement or in which such parties have otherwise become
prohibited from using EURIBOR.
• … in which EURIBOR is permanently no longer published, i.e. without any previous official announcement by the competent authority or the
administrator.

Market participants are recommended NOT to include as a trigger event…

• Material change in the EURIBOR methodology as defined by the EMMI should not result in an automatic trigger event.
• Market participants are recommended not to include as a trigger an event in which EURIBOR is calculated in accordance with its reduced submissions
or other contingency measures.

69
Recommendations on
EURIBOR fallback
measures for cash products

70
 Recommendations on EURIBOR fallback
measures for cash products
Objective
Define the most appropriate
EURIBOR fallback rate for each
financial product based on:
• a €STR-based term structure
methodology assessed against a list
of key criteria, and
• a spread adjustment methodology to
mitigate potential value transfers in
case the fallback is triggered
Propose market conventions to
use for the calculation of
compounded term rates based on
the €STR.
Fallback rate
Types of €STR-based term structure
The working group considered two types of €STR-based term structure methodology as a
component of EURIBOR fallback measures:
1. Forward-looking term structures are based on quotes and transactions in the derivatives
markets referencing the €STR and reflect market expectations of the evolution of the €STR
during the upcoming interest rate period. They would be known at the start of the interest rate
period.
2. Backward-looking term structures are based on simple mathematical calculations of the
value of past realised daily fixings of the overnight risk-free rate by compounding the fixings
over a given period of time. The working group considered the payment delay, the lookback
period and the last reset methodologies as viable for specific asset classes.
Derivatives
The working group acknowledges the EURIBOR fallback measures for derivatives products that
ISDA included in (1) the 2006 ISDA Definitions for new transactions, and (2) the IBOR Fallbacks
Protocol for legacy contracts, if market participants choose to adhere to it. Therefore, the working
group’s recommendations only include specific use cases for cash products.
71
 Recommendations on EURIBOR fallback Fallback rate

measures for cash products

Specific use cases

* For retail mortgages and consumer/SME loans, these comments specifically refer to the second level of the waterfall
** For securitizations, market participants could also consider consistency with other debt securities

72
Recommendations on EURIBOR fallback
measures for cash products
Recommendations for a credit spread
adjustment
In order to ensure economic equivalence between Euribor and
the corresponding €STR term structures (forward-looking or
backward-looking), the working group recommends to calculate
and apply a spread adjustment that reflects the value of a bank’s
credit risk and other premia embedded in EURIBOR.
1. The five-year historical median spread adjustment
methodology should be the preferred approach for cash
products.
2. It´s highly desirable that the above approach should be
applied across Euribor and other IBOR-linked cash products.
3. The spread adjustment value for each individual tenor should
be the same irrespective of the term structure methodology
chosen (e.g. forward-looking and backward-looking).
4. Should the historical €STR market data be insufficient to
compute an adjustment spread, data can be obtained by
using historical EONIA market data with a fixed spread of 8.5
bps between the two indices, given that EONIA has been
recalibrated to €STR + 8.5 bps.
5. No one-year transition period is required.
Spread adjustment
Recommendations for conventions when using a €STR-
based backward-looking term structure methodology
1. For those cash products for which the working group suggests using a
backward-looking term structure, the working group recommends market
participants to use the compounded €STR average rates, as will be
published by the ECB as of 15 April 2021.
2. The working group recommends the publication of the spread adjustment
and/or an all-in rate that consists of (i) compounded €STR average rates
with an observation shift, and (ii) the historical median spread adjustment.
3. In case a floor is applied in a contract, the working group recommends to
apply the floor to the compounded €STR rate plus the five-year historical
median spread adjustment.
4. Based on the simpler calculation methodology and consistency with the
derivative market, the working group recommends the compounding the
rate methodology.
5. For those cash products for which the working group suggests a
backward-looking lookback period methodology, the working group
recommends market participants to use the observational shift calculation
methodology, with the use of the lag approach as a robust alternative to
the observational shift approach.
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Recap on Short-Term Rate Benchmarks Transition

o No discontinuation is expected for EURIBOR after the reform

FIXED
POINTS

o EONIA discontinuation is irreversible and fixed at the end of 2021

o €STR is the European risk-free rate, it is already in use in the market and it is the fallback for EONIA
(+8.5BP)
o LIBOR will be no longer usable in new contracts from the beginning of 2022 and only for LIBOR $
existing contracts it will be admitted until 2023. New risk-free rates are already available for all
currencies
o ISDA has already published the new documents for derivatives transition

o Will EURIBOR become even more reliable thanks to the enlargement of the contributing panel (the
OPEN administrator is working on this issue) and /or due to a more liquid money market in the next future?

POINTS o EURIBOR FALLBACK RATE

• when will be really available a Term €STR curve forward looking (expected Jan 2022). Will we
have a plurality of curves or just one?
• will €STR compounded backward looking be used as much as possible as recommended
also for cash products?
o After the recommendation of CME SOFR Term Structure, will the transition from USD Libor be easier
and will the market be ready to stop using USD Libor even before 2023?
o Will different fallback rules for some cash and derivatives products generate further market
evolution, to manage new risks that could arise?