Alternative benchmarks: new ministerial orders for the application of Law No. 1.522 of 11 February 2022

The four forgotten ministerial decrees apply Law No. 1.522 of 11 February 2022 on reference indices.

SUMMARY

• Designation of reference indices to replace CHF LIBOR (by SARON) and EONIA (by ERSTR) from 1 and 3 January 2022 respectively;
• Criteria to be taken into account when determining the suitability of an alternative benchmark (degree of credibility, impact on economic value, etc.);
• Simplified prospectus for mutual funds or investment funds using a benchmark: mention of the contingency plan in the "additional information" section.
  

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IN DETAIL

> Replacement reference indices for CHF LIBOR and EONIA (application of Article 6 of Law No 1.522):

— Presentation:

Pursuant to Article 6 of Law No. 1.522, the Minister of State is competent to designate by ministerial order the replacement reference index (which is substituted for a reference index provided by an administrator and used by credit institutions, companies and entities authorised on the basis of Article 2 of Law n° 1. 338 of 7 September 2007, as amended, and insurance undertakings) which has been the subject of a replacement decision (issued in particular by the European Commission pursuant to Regulation (EU) 2021/168 of the European Parliament and of the Council of 10 February 2021 amending Regulation (EU) 2016/1011 as regards the exemption of certain third-country spot foreign exchange benchmarks and the designation of replacements for certain benchmarks in cessation, and amending Regulation (EU) No 648/2012).

The replacement benchmarks designated by Ministerial Orders No. 2022-120 and No. 2022-121 of 9 March 2022 hereinafter set out, shall automatically replace all references to the replaced benchmark, in all contracts and in the contractual documentation of mutual funds, investment funds and financial instruments referring to them, where no contractual fallback provisions are stipulated therein or where the contractual fallback provisions are inappropriate.

A fallback provision is considered inappropriate where :

(a) it does not provide for the permanent replacement of the reference index in the event of termination; or

(b) its application requires the consent of a third party which has been refused; or

(c) it provides for a replacement index which no longer reflects or differs significantly from the underlying economic reality or market which the discontinued benchmark is intended to measure.

These alternative benchmarks shall not apply where all or a required majority of the parties to a contract have agreed to apply a different alternative benchmark, whether before or after the publication of that index, or where the contractual documentation of a unit trust, investment fund or financial instrument so provides:

— Ministerial Order No. 2022-120 of 9 March 2022 designating the replacement rates for the CHF Libor pursuant to Article 6 of Law No. 1.522 of 11 February 2022 (JDM No. 8582 of 8 March 2022)

As from 1 January 2022, the SARON (Swiss Average Rate Overnight) is designated as a replacement rate for the CHF LIBOR (London Interbank Offered Rate Swiss Francs) in contracts and in the contractual documentation of mutual funds, investment funds and financial instruments which refer to the CHF LIBOR (under the conditions of Art. 6 of Law No. 1.522 described above).

Issued by the European Commission Implementing Regulation (EU) 2021/1847 of 14 October 2021.

— Ministerial Order No. 2022-121 of 9 March 2022 designating the replacement rate for Eonia pursuant to Article 6 of Law No. 1.522 of 11 February 2022 (JDM n°8582 of 8 March 2022)

As from 3 January 2022, the EURSTR short-term rate in euro published by the European Central Bank is designated as a replacement index for the weighted average overnight rate EONIA (Euro OverNight Index Average) for references made to the latter in contracts and in the contractual documentation of mutual funds, investment funds and financial instruments

Issued by the European Commission Implementing Regulation (EU) 2021/1848 of 21 October 2021.

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> Criteria to be taken into consideration to determine the relevance of an alternative reference index (application of Article 3 of Law n° 1.522) :

— Ministerial Order No. 2022-123 of 9 March 2022 implementing Article 3 of Law No. 1.522 of 11 February 2022 (JDM No. 8582 of 8 March 2022)

Article 3 of Law No. 1.522 empties the fallback clauses inserted in the contracts and contractual documentation of mutual funds, investment funds and financial instruments, which designate at least one other reference index to replace the initially designated reference index in the event that the latter is no longer provided.

To determine the relevance of an alternative index, the professionals concerned (credit institutions, companies and entities authorised on the basis of Article 2 of Law No. 1.338 of 7 September 2007, as amended, and insurance undertakings) must take into consideration the criteria defined by Ministerial Order 2022-123 (based on those proposed by the O.I.C.V.), namely:

1°) the degree of credibility of the alternative reference index, including the extent to which it corresponds to the characteristics of the initial index, the way in which economic differentials between the alternative index and the initial reference index are minimised, the extent to which an alternative index meets the needs of the parties and the availability of data on the alternative index;

2°) whether and how the initial benchmark and the alternative index could be maintained in parallel for a period of time in order to facilitate the transition to the new benchmark

3°) the moment when the alternative benchmark would start to apply, taking into account the duration of contracts, mutual funds, investment funds and the life of financial instruments referencing the benchmarks, as well as the adequacy of the notice period concerned; and

4°) the impact on the economic value of the contracts, mutual funds, investment funds and financial instruments referencing the reference index, ensuring in particular that the alternative index would be appropriate.

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> Reference to the contingency plan in the “Additional information” section of the simplified prospectus of mutual funds or investment funds using a benchmark (Articles 3 and 4 of Law 1522)

The professionals concerned are required to draw up and maintain written contingency plans setting out the policies and procedures for action to be taken in the event that a chosen benchmark undergoes significant changes or disappears.

— Ministerial Order No. 2022-122 of 9 March 2022 amending Ministerial Order No. 2016-353 of 6 June 2016 on the simplified prospectus of a mutual fund or an investment fund, as amended (JDM No. 8582 of 8 March 2022)

Where a unit trust or an investment fund uses a benchmark, the additional information must refer to the contingency plan adopted by the management company in the event that the benchmark is substantially modified or ceases to be provided. Where the contingency plan contains a fallback clause, this must be included in the additional information. (new art. 10-1 Ministerial Order n° 2016-353).

As a result, the “Additional information” Part of the simplified prospectus presentation template in the annex to Ministerial Order No. 2016-353 includes the following statement:

“Benchmark indicator (if applicable)

Define the indicator (composition, administrator(s), coupons/dividends, website where additional information can be obtained…).

In the case of a benchmark used to measure the performance of a fund in order to replicate its performance, to define the allocation of the portfolio’s assets or to calculate a performance fee, refer to the contingency plan adopted by the management company and specify, if applicable, the fallback clause used.”