EC proposing change of law to continue non-deliverable forwards

Last week we saw the UK take action to prevent the onshored Benchmarks Regulation preventing UK regulated entities being able to refer to unauthorised spot FX rates, some of which (such as KRW/USD and TWD/USD) are widely used in non-deliverable forward contracts. Its solution was to delay the current transition period under the BMR until the end of 2025. The EC’s second proposed amendment from last Friday to amend the Benchmarks Regulation concerns the same issue, and proposes amending the BMR to permit the EC to designate certain spot FX rate benchmarks. EU regulated entities need something, because these rates are used by them to hedge their risk (e.g. to hedge the KRD, TWD and the PHP), but they are provided by a non-EU administrator which is not regulated under the BMR and is unlikely to apply to be, and which is not likely to come under an equivalence declaration either, because most non-EU countries do not even have a specific benchmark regulatory regime which covers spot FX, which gives you nothing to compare against the EU rules, without which you cannot have equivalence.  EU regulated entities are currently in a transitional phase which allows them to “use” unauthorised benchmarks until the end of 2021, but after that, if nothing were done, they would be unable to carry on using these spot FX rates to hedge themselves.  The EC had considered the possibility of a blanket exemption from the BMR for any third country benchmark unless it had been designated as critical for financial stability in the EU (which is what AFME and ISDA and others had proposed earlier this month, but decided it could not because this would have been inconsistent with the original BMR approach, which is to provide for comprehensive coverage of all third country benchmarks.