Law no. 1.522 of 11 February 2022 on benchmarks indices

Law no. 1.522 of 11 February 2022 on benchmark indices (JDM no. 8577 of 11 February 2022) is the result of Bill no. 1051 on benchmark indices (7 articles), received by the National Council (Parliament) on 6 December 2021 and voted in Extraordinary Public Session on 31 January 2022.

It relates to the financial activities of 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 companies, as well as to their contractual relations with their customers.

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SUMMARY

Law no. 1.522 concerns ‘the problem of the cessation or abandonment of reference indices such as the London Interbank Offered Rate, LIBOR, which will take place at the end of 2021[1], while there are many contracts relating to loans, term deposits, securities and derivatives which refer to such reference indices’[2].

In concrete terms, with the‘objective of legal certainty, both from the point of view of the stability of the financial system and in the context of the contractual relations between banking and financial sector professionals and their clients’, Law no. 1.522 aims:

— on the one hand, ‘to ensure that professionals who use benchmark indices take preventive measures to prevent the disappearance of such indices’;

— secondly, ‘where the disappearance of a reference index makes it impossible to designate a new index by means of contractual negotiation’, to give the regulatory authorities the power to designate a replacement index that will allow contracts to continue.

Law no. 1.522 is inspired by the Principles for Financial Benchmarks defined by the International Organisation of Securities Commissions (IOSCO), as well as its Declaration on the issues to be taken into consideration when using financial benchmarks (to choose an appropriate index and to establish contingency plans in the event of the disappearance of such an index).

Given the proximity of the Monegasque banking and financial sector to French and European Union law, the Monegasque legislator also relied on Regulation (EU) 2021/168 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. Regulation (EU) 2021/168 established a framework for the orderly discontinuation or abandonment of benchmark indices.

This includes a mechanism for switching existing contracts or certain financial instruments within the meaning of Directive 2014/65/EU to a designated replacement reference index, where these contracts or financial instruments cannot be renegotiated to incorporate a contractual fallback provision before the cessation of this reference index.

Indeed, a large number of contracts affecting economic operators in the European Union relating to debt, loans, term deposits, securities and derivatives refer to LIBOR and do not contain sufficiently robust fallback provisions to cover the cessation or abandonment of LIBOR. Regulation (EU) 2021/168 thus makes it possible to avoid the non-execution of contracts, which could seriously disrupt the functioning of the European Union's financial markets.

It should be remembered that under the Franco-Monegasque agreements on banking and the Monetary Agreement of 29 November 2021 with the European Union, French law governs the activity and supervision of Monegasque credit institutions.

However, the contractual relations of the professionals concerned with their customers and the financial activities in question here are governed by Monegasque law.

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Outline of the provisions of Law No. 1.522:

♦ Definitions of benchmark indices:

Is adopted the definition of Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and contracts or to measure the performance of investment funds. This is because of ‘both the practical and conventional proximity of Monaco's banking and financial sector to French and European Union law.’[3]

A ‘benchmark index’ is defined as ‘any index by reference to which the amount payable under a financial instrument or credit agreement or the value of a financial instrument is determined, or an index that is used to measure the performance of a mutual fund or investment fund for the purpose of replicating the performance of that index, defining the asset allocation of a portfolio or calculating performance fees;’.

♦ Obligation to document the choice of benchmark selected:

The reference index chosen must be appropriate for the targeted use.

♦ Obligation to establish in writing and keep up to date contingency plans defining the policies and procedures relating to the measures to be taken if a chosen reference index undergoes significant changes or disappears:

The professionals involved must ensure that the contingency plans are sound (ability to respond effectively to the hypotheses of a benchmark changing or disappearing).

They must also ensure the relevance of policies and procedures, based on the criteria proposed by the IOSCO (policies and procedures adapted to the purpose of the contracts, to existing and future financial instruments, and to mutual funds and investment funds that refer to a benchmark index; measurement of the potential impact that could result from the cessation or a significant change in the benchmark index).

♦ Contractual relations with customers:

Relevant professionals are required to incorporate contingency plans into contractual relationships with their clients. Where possible and appropriate, these contingency plans shall include sufficiently robust model ‘fallback’ clauses to be inserted in contracts and in the contractual documentation of unit trusts, investment funds and financial instruments. They are also inserted, where possible, into existing contracts as part of a renegotiation, and into the contractual documentation of existing mutual funds, investment funds and financial instruments. The fallback clauses designate at least one other reference index to replace the index initially designated, in the event that the latter is no longer supplied.

♦ Determining the appropriateness of the replacement reference rate:

The professionals concerned must refer to the criteria defined by ministerial decree on the basis of those proposed by the IOSCO.

♦ Obligation control mechanism:

The professionals concerned are required to provide the documentation relating to the choice of index and the contingency plans, as the case may be, to the Minister of State (credit institutions and insurance companies) or to the Commission de Contrôle des Activités Financières - C.C.A.F. (companies and entities authorised on the basis of Article 2 of Law no. 1.338 of 7 September 2007) on request.

Penalties for breaches of obligations could be imposed by the Minister of State or the C.C.A.F. Article 34 of Law no. 1.338 of 7 September 2007, as amended, would be supplemented to refer to breaches of obligations relating to benchmark indices.

♦ Competence of the Minister of State, where a reference index is the subject of a replacement decision, issued in particular by the European Commission pursuant to Regulation (EU) 2021/168 referred to above, to designate by ministerial order the replacement reference index that would be substituted for it:

The replacement index thus designated would then replace the index concerned in all contracts or documentation referring to it, but only in the event that the contracts or documentation in question do not contain a fallback clause or if such a clause is inappropriate.

A fallback provision is considered inappropriate if:

a) it does not provide for the definitive 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 the economic reality or the underlying market which the discontinued benchmark index is intended to measure or which differs
is intended to measure.

The replacement index so designated by ministerial order would apply only in the absence of agreement by the parties.

♦ Application over time:

Within nine months of the law coming into force, the professionals concerned must comply with the obligations to formalise and document the choice of the reference index used, to draw up and keep up to date contingency plans and to incorporate them into their contractual relations with their customers.

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Notes:

[1] The London Interbank Offered Rate (LIBOR) is the average daily reference interest rate, set at approximately 11.45 a.m. (London time) by a group of major UK banks, applicable to unsecured loans between banks. LIBOR is based on five currencies (pound sterling, US dollar, euro, Japanese yen and Swiss franc). It is used as a benchmark to price financial contracts worldwide, including mortgages and other loans, credit cards and complex derivative contracts. In 2012, it became the subject of a major rate manipulation scandal by a number of UK banks (resulting in billions of dollars in fines against the banks and the conviction of several bankers). LIBOR will disappear on 31 December 2021 and be replaced by non-manipulable ‘risk free rates’ (RFR).

More information, for example > https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor, https://www.banque-france.fr/sites/default/files/rapport_30_f.pdf, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf,

[2] Explanatory memorandum to Bill no. 1051, p. 1

[3] Explanatory memorandum to Bill no.1051, p. 3.

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