Can Africa take advantage of the extraterritoriality of European law?

After the EU EMIR and GDPR Regulations, now comes the EU Benchmark Regulation!

Kawtar RAJI-BRIAND Attorney at the Casablanca Bar

Alain GAUVIN ASAFO & Co. Attorney-Partner

Should we always be concerned about the extraterritoriality of laws? A few years ago, we castigated the tendency in American law to govern acts committed by foreign operators on the territory of third States. We cite as an example the case of an operator denominating its operations in USD and thus running the risk of huge penalties in the USA, even though it fully complied with the law applicable to it and that of the countries in which it operated; or the case of a foreign company which, when going to be listed on Wall Street, was forced to execute obligations in violation of its own national law. Not to mention the onerous FATCA Law![1].

The USA is no longer alone in adopting texts with extraterritorial effects: the European Union (EU) is also engaging in legal imperialism. Thus, African banks were able to measure the consequences of the EMIR Regulation on financial futures contracts concluded with European banks. This EU text has highlighted the difficulties inherent in the questionable validity of collaterals transferring ownership under the laws of certain African countries or even in the right (or the prohibition) to early-terminate contracts if a bankruptcy event occurred. Even more generally, many African companies have to adapt to the consequences of the famous GDPR Regulation on the protection of personal data.

This European legal conquest continues with EU Regulation 2016/1011 known as the “EU Benchmark Regulation“[2]. Should we regret it? Certainly not because, unlike some of the American texts criticized, the EU Benchmark Regulation does not stem from a selfish approach, in the sole interest of the EU or its companies, but benefits any operator that utilizes “indices used as benchmarks“, such as “LIBOR” and “EURIBOR”, in financial transactions.

According to its Article 1, the EU Benchmark Regulation aims to “ensure the accuracy and integrity of indices used as benchmarks […] while achieving a high level of consumer and investor protection.”

So what led the European authorities to take on a problem – the determination of benchmarks – that is generally left to the discretion of the markets? Recent history has shown that the reliability of benchmarks is questionable, not only for technical reasons, but also for issues of conflict of interest and even manipulation[3]. That is why the “IBOR” (Inter Bank Offered Rates) will be discontinued from January 3, 2022 to make way for the “RFRs” (Risk-Free Rates).

What are these RFRs? These indices are supposed to be without risk because, in accordance with the EU Benchmark Regulation, they are determined on the basis of real transactions and are therefore no longer the result of simple estimates, which are too subjective.

For example, the “EURIBOR” has been brought into conformity with the EU Benchmark Regulation by amending its definition and by revising the method of calculation, according to a “hybrid method” which is based as much as possible on actual transactions. Expert assessments can be taken into account when data relating to actual transactions is not available.

The “LIBOR” meanwhile, will disappear at the end of 2021[4] and will be replaced by RFRs, determined in accordance with the EU Benchmark Regulation, such as the SONIA (Sterling Overnight Index Average) administered by the Bank of England, the SOFR (Secured Overnight Financing Rate) calculated and published by the Federal Reserve or the TONAR (Tokyo Overnight Average Rate) replacing the LIBOR in USD, GPB and Yen respectively.

How is Africa concerned?

African banks enter into transactions to hedge their exposure, and that of their clients, to various financial risks. These hedging transactions are most often documented by means of contracts drawn up by the “ISDA” (International Swaps and Derivatives Association), which have long included “fallback clauses” aimed at determining a substitution rate in the event that a reference rate is unavailable. These clauses were however designed to compensate for a temporary unavailability and could therefore not remedy, for example, the cessation of an index. That is why, on October 23, 2020, the ISDA published a series of contractual documents applicable since January 25, 2021, in accordance with the EU Benchmark Regulation. The ISDA provides for three cases in which the disappearance of a benchmark (“Index Cessation Events“) is likely to result in the application of the fallback rate (see box) while opting for a raft of replacement options (the so-called “Fallback Waterfall” approach)[5]. In summary, the three Index Cessation Events are the following:

• The first case is where the administrator of the benchmark publicly declares that it has ceased to provide this index, or will cease to provide it, and that no administrator will succeed it in providing that index;
• The second case is when such a declaration emanates, not from the administrator, but from its supervisory authority or from the central bank of the benchmark currency or from a competent court;
• Finally, the third case is when, with regard to LIBOR in US dollars, pounds sterling or Swiss francs, the supervisory authority decides that the rate is no longer or will be no longer representative of the economic reality.

There is no question of describing, here, the operation of this mechanism. But, as parties to ISDA contracts, African banks are directly concerned and must master these new rules, all the more so since some of them – those set out in the “ISDA IBOR Fallbacks Protocol” – are intended to apply to transactions that have already been concluded.