LONDON, July 23 (Reuters) - The European Union’s executive proposed new powers for itself on Friday to rewrite financial contracts left high and dry by the demise of the Libor interest rate at the end of next year.
The London Interbank Offered Rate is being scrapped after banks were fined billions of dollars for trying to rig the benchmark, which is used for contracts from home loans to derivatives and credit cards worth trillions of dollars globally.
Regulators are putting pressure on market participants to change references to Libor to alternative rates such as those compiled by central banks, but not all contracts that mature beyond 2021 are likely to be amended in time.
The European Commission would have the power to mandate which alternative rate must be used, said Valdis Dombrovskis, the EU executive arm’s vice president.
Currently, EU rules on financial benchmarks focuses on ensuring their reliability, with no powers related to the disappearance of a benchmark.
The aim is to avoid the cessation of Libor leading to a legal vacuum that can be exploited by those who do not wish to honour their contractual obligations, the EU executive said.
“Our proposal would provide the necessary legal certainty,” Dombrovskis said.
In selecting an alternative rate, Brussels would take into account recommendations from national industry groups across the world, such as using the Federal Reserve’s Sofr rate for dollar-denominated Libor contracts.
The new powers would only apply to contracts taken out by supervised entities like investment firms and asset managers. Remaining contracts come under national laws in the EU.
“At the appropriate time, the European Commission might recommend that national laws supplement the harmonised replacement rate that applies to supervised entities,” it said. (Reporting by Huw Jones, editing by Larry King)