1. Why has the Commission adopted a Communication on Energy Prices?
The European Union, like many other regions in the world, is currently facing a sharp spike in energy prices. This is a serious concern for citizens, businesses, the European Commission and governments all over the EU.
Today’s spike is principally driven by increased global demand for energy, in particular gas, linked to the global economic recovery. While energy price fluctuations have occurred in the past, the current situation is exceptional as European households and companies face the prospect of higher energy bills at a time when many have been hit by loss of income due to the pandemic. This could weigh on Europe’s recovery and its fairness and inclusiveness, and exacerbate energy poverty. It also risks undermining confidence and support in the clean energy transition which is required not just to avert disastrous climate change but also to reduce the EU’s vulnerability to fossil fuel price volatility.
The European Commission aims to help and support Member States in addressing the negative impact on households and businesses. Having listened to Member States, the European Parliament, industry and consumers, and international partners, it has prepared this Communication to enact and support appropriate measures to mitigate the impact of the current energy price rises.
2. How long is the current situation expected to last?
Market expectations on energy commodities indicate that the current price increases are likely to be temporary. Wholesale gas prices are likely to remain high over the winter months and fall in the Spring, when the situation is expected to stabilise. The prices would remain, however, higher than the average of the past years.
In the longer term, greater investment in renewables, energy efficiency, buildings and smarter energy systems in Europe will increase the EU’s energy independence from imported fossil fuels and contribute to lower wholesale prices. However, in the medium term, new adjustments of supply and demand could occur and further episodes of price volatility on wholesale markets cannot be ruled out for a variety of geopolitical, technological and economic reasons.
3. Does the Commission expect EU Member States to run out of gas this winter?
While energy supply is not at immediate risk, security of supply and gas storage levels need continuous monitoring. Current EU gas storage levels are slightly above 75%. This is below the 90% average at this time in the last 10 years, but storage levels have been steadily rising since the summer.
Together with the EU’s experts group on gas security of supply (“Gas Coordination Group”) and the European Network of Transmission System Operators for Gas (ENTSO-G), the Commission is closely monitoring the security of supply situation, including the level of gas storage and imports. As foreseen by the EU rules, ENTSO-G published its “Winter Outlook” on 12 October to assess the capacity of the gas network to cope with possible problems during the next winter. The outlook finds that the European gas infrastructure offers sufficient flexibility to the market across the winter.
4. What measures is the Commission proposing to tackle the current price spike?
The current price spike requires a rapid and coordinated response. The existing legal framework enables the EU and its Member States to take action to address the effects of sudden price fluctuations. The immediate response should prioritise tailored measures that can rapidly mitigate the effects on vulnerable groups, can easily be adjusted when the situation improves, and avoid interfering with market dynamics or dampening incentives for the transition to a decarbonised economy. In the medium term, the policy response should focus on making the EU more efficient in the use of energy, less dependent on fossil fuels and more resilient to energy price spikes, while providing affordable and clean energy to end-users.
The toolbox presented as part of this Communication allows a co-ordinated approach to protect those most at risk. It is carefully calibrated to meet the above goals.
Immediate measures to protect consumers and businesses:

Provide emergency income support for energy-poor consumers, for example through vouchers or partial bill payments, which can be supported with EU ETS revenues;
Authorise temporary deferrals of bill payments;
Put in place safeguards to avoid disconnections from the grid;
Provide temporary, targeted reductions in taxation rates for vulnerable households;
Provide aid to companies or industries, in line with EU state aid rules;
Enhance international energy outreach to ensure the transparency, liquidity and flexibility of international markets;
Investigate possible anti-competitive behaviour in the energy market and ask European Securities and Markets Authority (ESMA) to further enhance monitoring of developments in the carbon market;
Facilitate a wider access to renewable power purchase agreements and support them via flanking measures. 

Medium-term measures for a decarbonised and resilient energy system:

Step up investments in renewables, renovations and energy efficiency and speed up renewables auctions and permitting processes;
Develop energy storage capacity, to support the evolving renewables share, including batteries and hydrogen;
Ask European energy regulators (ACER) to study the benefits and drawbacks of the existing electricity market design and propose recommendations to the Commission where relevant;
Consider revising the security of supply regulation to ensure a better use and functioning of gas storage in Europe;
Explore the potential benefits of voluntary joint procurement by Member States of gas stocks;
Set up new cross-border regional gas risk groups to analyse risks and advise Member States on the design of their national preventive and emergency action plans;
Boost the role of consumers in the energy market, by empowering them to choose and change suppliers, generate their own electricity, and join energy communities;
Adopt a rule book for cybersecurity for electricity;
Propose, by December 2021, a Council Recommendation providing further guidance to Member States on how best to address the social and labour aspects of the green transition. 

5. How does the EU internal energy market work, and is it the cause of the current high prices?
Before the internal energy market, the European energy system was characterised by energy monopolies and prices set by regulators, leading to an expensive, inefficient system that did not allow customers to benefit from competition between energy companies. The internal energy market has moved the EU away from this situation. The current market design allows all EU citizens to choose between different electricity and gas suppliers and provides clear price signals to incentivise investments in clean technologies. By connecting 27 national energy markets, the integrated EU energy market has brought costs down, saves millions of tons of CO2, and enhances security of supply. The internal market also facilitates consumer empowerment – including through joining energy communities or producing their own electricity.
The wholesale electricity market is where the producers of energy (power plants) sell electricity, and energy retailers buy it to deliver to their clients. It is a so-called “marginal” pricing system, which works by putting on the market power plants by the order of their price, starting with the least expensive and going until the last plant is dispatched that is needed to meet consumers’ demand. It is this last plant that sets the overall price, and which is often (in the hours of higher consumer demand) a gas or coal power plant. All electricity producers are paid the same price for the same product – electricity. There is general consensus that the marginal model is the most efficient for liberalised electricity markets because generators have an interest not to bid higher than their actual operating costs. Other systems lead to more inefficient outcomes and favour speculation, to the detriment of consumers.
The market also works across borders through a process known as market coupling, which ensures efficient markets where electricity flows from areas with lower electricity prices to those with higher prices. This keeps electricity costs down for consumers throughout the EU and means that Member States can rely on supplies from their neighbours when needed, supporting security of electricity supply.
Electricity producers and suppliers also trade on forward markets. These forward prices reflect periods of high and low demand and allow both producers and suppliers to reduce the risks of short-term movements in energy prices. Effective forward markets are also a key part of the internal market.
The wholesale electricity price is one of the components of the final electricity bill paid by consumers. The final electricity bill also reflects the costs of transporting and distributing it (network costs) and taxes and levies. On average, each of the three electricity bill components makes up one third of the total bill, with some variation between Member States.
With the current wholesale electricity price being driven up by global gas prices, some have questioned whether this market model is still appropriate. As the price spikes are driven by global conditions, it is unlikely that alternative market models would produce better outcomes. Nevertheless, the Commission is now tasking ACER (the agency of European energy regulators) to look into the benefits and drawbacks of the current market model, and its implementation by Member States, to ensure that the market design continues to serve our needs.
6. Are external energy suppliers to blame for the current situation?
The current electricity price increase is primarily due to global demand for gas, which is soaring as the economic recovery is picking up. This rising demand has not yet been matched by increasing supply, and the effects are felt not only in the EU but also in other regions of the world.
Given the global nature of the current price surge, international cooperation on the supply, transport and consumption of natural gas can help in keeping natural gas prices in check. The Commission is in dialogue with the main natural gas producing and consuming countries to facilitate increased natural gas trade. This dialogue with our international partners aims at enhancing the liquidity and flexibility of the international gas market in order to ensure sufficient and competitive natural gas supplies.
Lower-than-expected gas volumes have been observed coming from Russia, tightening the market as the heating season approaches. Though it has fulfilled its long-term contracts with its European counterparts, Gazprom has offered little or no extra capacity to ease pressure on the EU gas market. Delayed infrastructure maintenance during the pandemic has also constrained gas supply from Russia and other suppliers.
7. Is the EU’s climate ambition or carbon pricing responsible for the rise in prices?
The current situation is not the result of the EU’s climate ambition. Renewable electricity prices continue to be lower and more stable than fossil fuels. Investments in clean domestic energy production and greater energy efficiency reduce the EU’s energy import bill and dependence on non-EU suppliers.
The effect of the gas price increase on the electricity price is nine times bigger than the effect of the carbon price increase. From January 2021 to September 2021, the EU ETS price has increased by about €30/tCO2, which translates into a cost increase of about €10/MWh for electricity produced from gas (assuming a 50% efficiency) and about €25/MWh for electricity produced from coal (assuming a 40% efficiency). This is clearly outweighed by the observed increase of the gas price of about €45/MWh over the same period, which translates into additional electricity production cost of about €90/MWh.
The carbon price in the EU ETS rose primarily because of higher demand for allowances due to more robust economic activity following COVID-19 and expectations linked to the EU’s 2030 climate ambition, but not only. High gas prices themselves contribute to an increasing carbon price since they lead to an increased use of coal for power generation and consequently trigger more demand for emission allowances.
Emission allowances are classified as financial instruments under the revised Directive on Markets in Financial Instruments, to ensure a safe and efficient trading environment and protect the EU carbon market against market abuse and other types of misconduct. As such, trading in emission allowances is already subject to a robust oversight regime.
For more information

Press release

Compliments of the European Commission.
The post Questions and Answers: EU Commission Communication on Energy Prices first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Christine Lagarde, President of the ECB, at the Finance at Countdown event |
The urgent need to transition to carbon neutral
We have seen this summer what climate change can do in terms of disasters. We had floods in Europe, heatwaves in North America and elsewhere; there have been ample examples this year of what the world may look like in the future. And it might be worse. The prominence of climate change in the public debate shows that people are now sitting up and taking notice. To quote Honoré de Balzac, “It is easy to sit up and take notice. What is difficult is getting up and taking action”. This is now what we are seeing, and I take the view that everybody must take action, whatever their role, mission and position.
What we did at the ECB is conduct an economy-wide climate stress test, which provides evidence that there is a need for urgent action.[1] We conducted an exercise that combined the financial information and climate exposures of four million companies and some 1,600 consolidated euro area banks, and we mapped this to data in order to understand, on the basis of the scenarios of the Network for Greening the Financial System, what the climate change consequences could be. Let me give you one number: the default probabilities of the corporate loan portfolios of the most vulnerable banks could increase by 30% in a scenario of no further climate policies. And we also found out that the risks would be concentrated in certain areas and in certain banks.
An orderly transition to carbon neutral entails greater costs in the near term, but these are far outweighed over the longer term by lower physical risks and higher output. It is a no-brainer option. We need to take action. Even a disorderly transition, where policies are enacted in a haphazard way or before green technologies are fully mature, is still less costly than sitting down and watching and there being no transition at all. The long-run benefits from acting early on climate are clear.
In that context, I wanted to focus on three particular elements which are critically important and in which the financial sector can provide serious input: by disseminating information, accelerating innovation and bolstering adaptation.
Information
Financial markets have certainly started to grasp the opportunities of the green transition. Since 2015, assets under management of ESG funds[2] have almost tripled and the outstanding amount of green bonds issued by euro area residents has increased tenfold[3]. Yet this is just a fraction of the finance needed to meet net zero ambitions.
One of the key strengths of financial markets is their ability to absorb, analyse and disseminate information in a way that far exceeds what individuals can achieve by themselves. That is a role that can greatly benefit the green transition. Yet for sustainable finance itself to be sustainable, it needs to be trustworthy. That means taking active steps to root out greenwashing, developing standards and labels for financial products and ensuring that disclosures are comprehensive, internationally comparable and auditable. In addition, disclosures should be complemented by forward-looking measures that assess alignment with climate goals and net zero commitments. It is the future path for climate impact that matters most.
Innovation
By disseminating information, the financial sector can help steer credit to where it is needed to advance the transition. And one of the most vital places is innovation. Technological progress is necessary to further decouple economic growth from carbon usage, reduce emissions and develop working technologies for carbon capture and storage.
There are sectors where green innovation is beginning to have an impact. Solar power is now consistently a cheaper source of power than new coal or gas plants and in fact has become one of the cheapest forms of electricity generation the world has ever seen.[4] Renewables already generate more electricity worldwide than natural gas, and are set to surpass coal in the next couple of years.[5]
Yet there remain challenges for renewable energy to overcome, including the ability to flexibly change output on demand, or otherwise to efficiently store at scale. And there are several carbon-intensive sectors, such as metallurgy, cement and agriculture, for which carbon-zero technology is not yet mature and where much more and further innovation is needed.
While the rate of new technologies for climate change mitigation is increasing, Europe still has work to do. Bridging that gap and further accelerating innovation involves focusing on the entire structure of the financial system. Evidence produced by research at the ECB suggests that equity investments may play a beneficial role in boosting green innovation[6], and funding for venture capital is another area where the euro area needs to pick up the pace. That is why completing the capital markets union, as financial as it may sound, is going to contribute to this innovation that is needed and for which financing is indispensable.
Adaptation
The third contribution that finance can make is to bolster the process of adaptation to climate. Even if we manage to limit global warming to the goals of the Paris Agreement, physical risks are still set to increase.[7] For example, extreme sea level events that used to occur once in a hundred years could become annual events by the end of this century. While every effort needs to be made to contain that rise by transitioning to carbon neutral, greater attention also needs to be placed on mitigating and adapting to climate.
Banks can help ensure economic activity takes place in less exposed locations by incorporating exposures to physical risks, such as floods and droughts, into lending decisions. But banks are not the only players. Insurance companies can also play a key role by mitigating the negative impacts of climate-related catastrophes. Recent joint work between the European Central Bank and the European Insurance and Occupational Pensions Authority, which brings together all the insurance actors, finds that economic activity is less affected by catastrophes when a greater share of damages are covered by insurance.[8] As such events become more frequent due to climate change, the value to society of insurance protection increases.
Yet, when you look at the protection around Europe, there is a significant protection gap: roughly speaking, only a third of the damage from catastrophes in Europe is currently insured. For climate-related catastrophes such as droughts, heatwaves and wildfires, the coverage drops to just about 7%. And there are reasons to suspect that coverage may fall even further. There are widespread reports of households and businesses in California and Australia struggling to renew insurance in the wake of devastating wildfires.[9] So further consideration is needed at national and European levels to ensure the right constellation of risk-pooling is in place to ensure continued coverage. We need to adapt.
Conclusion
Combating climate change requires action from all parts of society. I have mentioned three important ways through which the financial sector can help protect against climate change: through information, innovation and adaptation. The ECB will also contribute within its mandate. Climate considerations played an important part in our recently concluded strategy review.[10] And climate change is definitely part of our considerations for setting monetary policy and implementing it. The Governing Council has decided on a comprehensive action plan to further incorporate climate change considerations throughout our policy framework.[11]
We need to not just sit up but take action. All of us, including the financial sector, including central banks, can play their part. And they will.
Compliments of the European Central Bank.
The post ECB | The contribution of finance to combating climate change first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Options to magnify the impact of the Special Drawing Rights Allocation through voluntary channeling.
One of the most significant measures introduced by the International Monetary Fund in response to the global pandemic was the recent historic allocation of Special Drawing Rights, or SDRs. The challenge now is to ensure this distribution is redirected—or channeled—to where the need is greatest. To that end, we are exploring three options to enable more resilient and sustainable economic futures for the poorest and most vulnerable countries.

‘The task now is to redirect the SDRs to their greatest effect.’

The IMF’s response to COVID-19
Since the onset of the COVID-19 pandemic, the IMF has lent nearly $117 billion to 87 countries. We reshaped our lending policies to enhance our support to members, and recently reformed our concessional lending policy framework under the Poverty Reduction and Growth Trust (PRGT) to expand our lending to low-income countries.
We have also joined forces with the other international organizations to help accelerate the global vaccine rollout, and improve access to non-vaccine therapeutics and diagnostics.
But we didn’t stop there. The historic SDR allocation, back in August, equivalent to $650 billion, boosted liquidity and reserves around the world. About $275 billion of that $650 billion went to emerging and developing countries, and low-income countries received about $21 billion, equivalent to as much as 6 percent of GDP in some cases.
Putting SDRs to work
The task now is to redirect the SDRs to their greatest effect. The International Monetary and Financial Committee, and leaders of the G7 and G20 called on the IMF to explore ways in which countries with strong external positions could voluntarily channel some of their SDRs to poorer and more vulnerable countries.
Against this backdrop, we are exploring three (non-mutually exclusive) options:
Increase the size of the PRGT on which we are already making good progress. Pledges of $24 billion in loan resources have already been received in the last 16 months, including $15 billion from existing SDRs.
But the journey is far from complete. Additional resources of around $28–50 billion are still needed to allow the IMF to better respond to the financing needs of our low-income members over the coming years. We also need grant contributions of SDR 2.3 billion for the subsidy account to continue lending through the PRGT at zero interest rates; fundraising efforts are ongoing.
Create a new IMF-administered Resilience and Sustainability Trust, or RST.
Channel SDRs to other prescribed SDR holders, comprising 14 organizations including the World Bank, some regional central banks, and multilateral development banks.
A new trust with a long-term purpose
Even as we fight this current pandemic, we cannot lose sight of other long-term challenges that countries face as we rebuild the global economy. We are experiencing a changing climate, increasing inequality, changing demographics, and a breakneck pace of digitalization, to name just a few.
These long-term structural challenges put vulnerable countries at risk of falling further behind. Often, these challenges go unaddressed because of financing and capacity constraints. Not implementing these reforms, however, puts at risk external, social, and economic stability.
The proposed RST would support policy reforms to help build economic resilience and sustainability, especially in low-income countries and small states, as well as vulnerable middle-income countries. It would aim to support access to more affordable financing by lending at cheaper rates and with longer maturities than the IMF’s traditional lending terms. Consistent with the IMF’s mandate, this financing would help be focused on balance of payments stability.
The purposes of the funding would be reached by consensus across the membership. For example, climate might be one, but there are several other worthy global public policy goals that may need to be considered such as pandemic preparedness.
For most creditors, channeled SDRs have to maintain their reserve asset status. This requires ensuring that the trust provides liquidity, and the ability of creditors to encash quickly should they have a balance of payments need, and finally, adequate credit risk protection for the donors.
We also propose developing a multi-layered credit risk protection framework that includes policy safeguards, financial buffers, and a diversified creditor and borrower base that would ensure that loans to the trust are sufficiently safe and liquid so that channeled SDRs can maintain their reserve asset status. In addition, since RST lending would likely “top up” a regular IMF-supported program, it would benefit from the accompanying strong policy safeguards, to ensure macroeconomic stability.
We are also working on several additional design features such as size of the trust, eligibility perimeter, conditionality, lending terms, and the financial architecture. We continue to engage with our membership and other stakeholders to ensure full buy-in, while working closely with other international financial institutions, especially the World Bank, to ensure that the RST is a part of a broader strategy for international country assistance, leveraging the respective mandates of each institution. We believe the membership will benefit from such an approach.
Getting across the finish line
The world has an historic opportunity to use the recently allocated $650 billion SDRs to help poorer countries in a way that promotes the global public policy agenda.
Building consensus is never easy; it takes time. Creative solutions are needed to bridge differences. We are confident that with the international community’s support, the RST is one such innovative solution which could become operational in just over a year. We are hopeful of further progress at the upcoming Annual Meetings. The pandemic has shown us the importance of working collectively. And together, we can tackle the greatest challenges we now face for a better future for everyone.
Authors:

Ceyla Pazarbasioglu is Director of the Strategy, Policy, and Review Department (SPR) of the IMF

Uma Ramakrishnan is currently Deputy Director of the IMF’s Strategy, Policy and Review Department

Compliments of the IMF.
The post IMF | Sharing the Recovery: SDR Channeling and a New Trust first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, Executive Vice-President Frans Timmermans, who leads the EU’s international negotiations on climate, and Special Presidential Envoy for Climate John Kerry hosted a virtual ministerial meeting to mobilise further support for the Global Methane Pledge. The co-convenors and Executive Director of the United Nations Environment Programme Inger Andersen affirmed the critical importance of rapidly reducing methane emissions as the single most effective strategy to reduce near-term global warming and keep the goal of limiting warming to 1.5 degrees Celsius within reach.
Following initial announcement of support by Argentina, Ghana, Indonesia, Iraq, Italy, Mexico and the United Kingdom at the MEF, 24 new countries announced today that they will join the Global Methane Pledge. The new supporters are Canada, Central African Republic, Congo-Brazzaville, Costa Rica, Cote d’Ivoire, Democratic Republic of the Congo, Federated States of Micronesia, France, Germany, Guatemala, Guinea, Israel, Japan, Jordan, Kyrgyz Republic, Liberia, Malta, Morocco, Nigeria, Pakistan, Philippines, Rwanda, Sweden, and Togo. With these commitments, 9 of the world’s top 20 methane emitters are now participating in the Pledge, representing about 30% of global methane emissions and 60% of the global economy.
In addition, more than 20 philanthropies announced combined commitments of over $200 million to support implementation of the Global Methane Pledge.
Background
At the Major Economies Forum on Energy and Climate (MEF) on September 17, 2021, President Ursula von der Leyen and President Joe Biden announced, with support from seven additional countries, the Global Methane Pledge—an initiative to be launched at the World Leaders Summit at the 26th UN Climate Change Conference (COP26) this November in Glasgow, United Kingdom.
Methane is a potent greenhouse gas and, according to the latest report by the Intergovernmental Panel on Climate Change, accounts for about half of the 1.0 degree Celsius net rise in global average temperature since the pre-industrial era, making methane action an essential complement of energy sector decarbonisation.
Countries joining the Global Methane Pledge commit to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030 and moving towards using highest tier IPCC good practice inventory methodologies to quantify methane emissions, with a particular focus on high emission sources. Successful implementation of the Pledge would reduce warming by at least 0.2 degrees Celsius by 2050.
The European Union, the United States, and other early supporters will continue to enlist additional countries to join the Global Methane Pledge, ahead of its formal launch at COP26.
Compliments of the European Commission.
The post Joint EU-US Statement on the Global Methane Pledge first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Vice Chair for Supervision Randal K. Quarles at The Structured Finance Association Conference, Las Vegas, Nevada |
Now that business travel has started to pick back up as we emerge from the COVID event, a prosaic but insistent problem has reappeared: what to read on a long plane flight. Like most of you, I try to get some work done—but, also like most of you, out of an amalgam of security concerns and indolence, I often don’t succeed. Something must improve the hours, but Kant is a little heavy, P.G. Wodehouse a little light, and T.S. Eliot looks like you’re just showing off. So, over the last few weeks, I’ve been re-reading Joan Didion while making my way from point A to point B: Slouching Toward Bethlehem, The White Album, and Where I Was From. As it turns out, Joan Didion is a particularly apt author to be reading on the way to this conference—not because the conference is being held in Las Vegas, although her four-page summation of this “most extreme and allegorical of American settlements” is a classic. But rather, because a nearly constant theme of her writing is change: how hard it is to recognize that things have changed; how hard it is to come to terms with it once recognized; how insistent people can be that surely, they will be OK.
And given that introduction, I’m sure you have now guessed what I intend to talk to you about today: LIBOR, the benchmark formerly known as the London Interbank Offered Rate. LIBOR was the principal benchmark used to set interest rates for a vast number of commercial loans, mortgages, securities, derivatives, and other products. For a number of years—certainly at least since July of 2017, and really for several years before—it has been clear that LIBOR would end, but some believed it was not clear exactly when LIBOR would end. And, as a result, many market participants have continued to use LIBOR as if that end date would surely be in some indefinitely distant future, as if LIBOR would remain available forever.
Earlier this year, however, things changed, and changed significantly. Two things happened which together make clear that LIBOR will no longer be available for any new contracts after the end of this year, just 86 days from now. First, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, and ICE Benchmark Administration (IBA), which administers LIBOR, announced definitive end dates for LIBOR.1 No U.S. dollar LIBOR tenors will be available after June 30, 2023.2
So, now there was a definitive and immovable date fixed for the end of LIBOR. However, the second thing that happened made clear that long before that end date in 2023, LIBOR would not be available for any new contracts after the end of this year. Following the FCA and IBA announcements about the end of LIBOR, the Federal Reserve and other regulators published guidance making clear that we will focus closely on whether supervised institutions stop new use of LIBOR by the end of this year—86 days from now.
If LIBOR will not be available for new contracts, what is the point of IBA continuing to provide USD LIBOR quotes until mid-2023? Those LIBOR quotes will allow many existing contracts to mature according to their terms, thus greatly reducing the costs and risks of this transition. Otherwise, many banks would have had to re-negotiate hundreds of thousands of loan contracts before December 31, an almost impossible task. But the whole process only works if no new LIBOR contracts are written while the legacy contracts are allowed to mature. So, those new LIBOR contracts will not be made. Change is difficult, but it is inescapable.
What is LIBOR, and Why is it Going Away?
LIBOR was intended to be a measure of the average interest rate at which large banks can borrow in wholesale funding markets for different periods of time, ranging from overnight to one month, three months, and beyond. LIBOR is an unsecured rate, which means that it measures interest rates for borrowings that are made without collateral and therefore include some credit risk.
At first blush, it may seem peculiar that a borrowing rate for banks in London has been used so widely. Why, for example, are more than $1 trillion of residential mortgages in the United States tied to LIBOR? The answer is that, over time, LIBOR’s pervasiveness became self-reinforcing. Lenders, borrowers, and debt issuers relied on LIBOR because, first, everyone else used LIBOR, and second, they could hedge their LIBOR exposures in liquid derivatives markets. Today, USD LIBOR is used in more than $200 trillion of financial contracts worldwide.
Federal Reserve officials have described LIBOR’s flaws on numerous occasions.3 The principal problem with LIBOR is that it was not what it purported to be. It claimed to be a measure of the cost of bank funding in the London money markets, but over time it became more of an arbitrary and sometimes self-interested announcement of what banks simply wished to charge for funds. That might not have become such a debacle had it been clear to everyone what the ground rules were, but the ground rules for LIBOR were anything but clear.
As a result of subsequent changes to the process, LIBOR panel banks now provide evidence of actual transactions where possible. A fundamental problem, however, is that LIBOR has been unable to separate itself from its perception as a measure of bank funding costs, yet the market on which LIBOR is based—the unsecured, short-term bank funding market—dwindled after the 2008 financial crisis. This means that, for many LIBOR term rates, banks must estimate their likely cost of such funding rather than report the actual cost.
Many LIBOR panel banks are uncomfortable estimating their funding costs in producing a benchmark perceived by many to measure actual funding costs. As a result, the great majority of the panel banks have determined that they will not continue participating in the process. This is why the FCA and IBA have announced definitive end dates for LIBOR.
I should note here that regulators have warned about LIBOR-related risks for many years. Beginning in 2013, the U.S. Financial Stability Oversight Council and the international Financial Stability Board, which I currently chair, expressed concern that the decline in unsecured short-term funding by banks could pose serious structural risks for unsecured benchmarks such as LIBOR.4 To mitigate these risks and promote a smooth transition away from LIBOR, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) in November 2014.5 As I will describe further in a moment, the ARRC has worked to facilitate the transition from LIBOR to its recommended alternative, the Secured Overnight Financing Rate (SOFR).
Supervisory Efforts
In November 2020, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) sent a letter to the banking organizations we regulate noting that, after 2021, the use of LIBOR in new transactions would pose safety and soundness risks.6 Accordingly, we encouraged supervised institutions to stop new use of LIBOR as soon as is practicable and, in any event, by the end of this year. The letter also noted that new contracts entered into before December 31, 2021, should either use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.
Recently, a number of institutions have asked what would qualify as “new” use of LIBOR after 2021. We are working with other agencies to provide additional guidance about this issue. In my view, however, “new” use of LIBOR would include any agreement that creates additional LIBOR exposure for a supervised institution or extends the term of an existing LIBOR contract.
Earlier this year, the Federal Reserve issued another supervisory letter that provided guidance concerning supervised institutions’ LIBOR transition plans.7 As the end of LIBOR approaches, Federal Reserve examiners have intensified their focus on supervised institutions’ transition planning. In general, institutions of all sizes have acknowledged year-end as the stop date for new LIBOR contracts and are operationally prepared to offer alternative rates. However, based on data from the second quarter of 2021, we estimate that large firms used alternative rates for less than 1 percent of floating rate corporate loans and 8 percent of derivatives. To be ready for year-end, lenders will have to pick up the pace, and our examiners expect to see supervised institutions accelerate their use of alternative rates.
Transitioning to Alternative Rates
A handful of firms have said that they may want more time to evaluate potential alternative rates. There is no more time, and banks will not find LIBOR available to use after year-end no matter how unhappy they may be with their options to replace it. I would note that the ARRC has been publishing tools to facilitate the use of SOFR for almost four years.8 SOFR is a broad measure of the cost of borrowing cash overnight, collateralized by Treasury securities. It rests on one of the deepest and most liquid markets in the world. It is calculated transparently by the Federal Reserve Bank of New York, engendering market confidence. And it can be used for all types of transactions. Notably, the ARRC recently recommended SOFR term rates, which will facilitate the transition from LIBOR to SOFR for market participants who wish to use a forward-looking rate.9 Given the availability of SOFR, including term SOFR, there will be no reason for a bank to use LIBOR after 2021 while trying to find a rate it likes better.
This is especially true for capital markets products. As I described recently in remarks to the Financial Stability Oversight Council, it is critical that capital markets and derivatives markets transition to SOFR. Market participants have expressed nearly universal agreement that this is the right replacement rate for such products.10 The ARRC did not recommend any other rate for capital markets or derivatives, and market participants should not expect such rates to be widely available.
Loans, however, are different from derivatives and capital markets products, and raise different issues. With respect to loans, the Federal Reserve, OCC, and FDIC issued a letter last year explaining that we have not endorsed a specific replacement rate.11 We have not changed that guidance. A bank may use SOFR for its loans, but it may also use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs. But a bank will not find LIBOR available after year-end, even if it doesn’t want to use SOFR for loans and hasn’t chosen a different alternative reference rate. Reviewing banks’ cessation of LIBOR use after year-end will be one of the highest priorities of the Fed’s bank supervisors in the coming months. If market participants do use a rate other than SOFR, they should ensure that they understand how their chosen reference rate is constructed, that they are aware of any fragilities associated with that rate, and—most importantly—that they use strong fallback provisions.
To conclude, I emphasize that market participants should be ready to stop using LIBOR by the end of 2021.12 One-week and two-month USD LIBOR will end in only 12 weeks. The remaining USD LIBOR tenors will end in mid-2023, but the LIBOR quotes available from January 2022 until June 2023 will only be appropriate for legacy contracts. Use of these quotes for new contracts would create safety and soundness risks for counterparties and the financial system. We will supervise firms accordingly.
Market participants should act now to accelerate their transition away from LIBOR. The reign of LIBOR will end imminently, and it will not come back. To return to where we started, the year of magical thinking is over.
Compliments of the U.S. Federal Reserve Board.

1. See https://www.fca.org.uk/news/press-releases/announcements-end-libor and https://ir.theice.com/press/news-details/2021/ICE-Benchmark-Administration-Publishes-Feedback-Statement-for-the-Consultation-on-Its-Intention-to-Cease-the-Publication-of-LIBOR-Settings/default.aspx. Return to text
2. One-week and two-month U.S. dollar LIBOR tenors will end as of December 30, 2021. IBA will cease publishing all remaining U.S. dollar LIBOR rates after June 30, 2023. Return to text
3. See https://www.federalreserve.gov/newsevents/speech/quarles20190410a.htm, https://www.federalreserve.gov/newsevents/speech/powell20140904a.htm, and https://www.federalreserve.gov/newsevents/testimony/vanderweide20210415a.htm. Return to text
4. See Financial Stability Oversight Council, 2013 Annual Report (PDF) (Washington: Department of the Treasury, 2013). See also Financial Stability Board, Reforming Major Interest Rate Benchmarks (PDF) (Basel, Switzerland: Financial Stability Board, July 2014). Return to text
5. The ARRC’s voting members are private sector firms, but the Federal Reserve and other official sector entities serve as ex-officio members of the ARRC. Return to text
6. See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130a.htm. Return to text
7. See SR 21-7, “Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR.” Earlier this year, I gave a speech that described this supervisory letter in detail. See also https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm. Return to text
8. The Federal Reserve Bank of New York began publishing SOFR in April 2018. Return to text
9. See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf. Return to text
10. See https://www.federalreserve.gov/supervisionreg/files/quarles-libor-presentation-20210611.pdf. Return to text
11. See https://www.federalreserve.gov/supervisionreg/srletters/SR2025.htm. Return to text
12. The Federal Reserve recognizes that market participants cannot fix some legacy LIBOR contracts. In particular, there are approximately $10 trillion of so-called “tough” legacy contracts that mature after LIBOR ends, but lack workable fallback language to address the end of LIBOR. The Federal Reserve welcomes efforts in Congress to craft federal legislation that would provide a workable fallback for these contracts. Return to text

Major reform of the international tax system finalised today at the OECD will ensure that Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.
The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.
Following years of intensive negotiations to bring the international tax system into the 21st century, 136 jurisdictions (out of the 140 members of the OECD/G20 Inclusive Framework on BEPS) joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. It updates and finalises a July political agreement by members of the Inclusive Framework to fundamentally reform international tax rules.
With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement.
The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington D.C. on 13 October, then to the G20 Leaders Summit in Rome at the end of the month.
The global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually. Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.  Specifically, multinational enterprises with global sales above EUR 20 billion and profitability above 10% – that can be considered as the winners of globalisation – will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions.
Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
Pillar Two introduces a global minimum corporate tax rate set at 15%.  The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” Secretary-General Cormann said.
Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention is already under development and will be the vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures. This will bring more certainty and help ease trade tensions. The OECD will develop model rules for bringing Pillar Two into domestic legislation during 2022, to be effective in 2023.
Developing countries, as members of the Inclusive Framework on an equal footing, have played an active role in the negotiations and the Two-Pillar Solution contains a number of features to ensure that the concerns of low-capacity countries are addressed. The OECD will ensure the rules can be effectively and efficiently administered, also offering comprehensive capacity building support to countries which need it.
Further information on the continuing international tax reform negotiations is also available at: https://oe.cd/bepsaction1.
Highlights Brochure
Frequently Asked Questions
Contacts:

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration | Pascal.Saint-Amans@oecd.org

Lawrence Speer | Lawrence.Speer@oecd.org

OECD Media Office | news.contact@oecd.org

Compliments of the OECD.
The post OECD | International community strikes a ground-breaking tax deal for the digital age first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

MEPs discussed solutions to the current energy price hikes as well as new tax avoidance revelations during October’s first plenary session.
Energy prices
Parliament approved an update of the selection rules for energy projects eligible for EU funding to support making cross-border energy infrastructure more sustainable. In a debate with Energy Commissioner Kadri Simson, MEPs stressed the urgent need to support vulnerable households in the EU faced with record high gas and electricity prices.
Tax revelations
MEPs discussed the Pandora papers revelations, documenting global tax avoidance and tax evasion, and slammed governments’ inability to properly reform outdated tax laws.
Arctic
Arctic states and the international community should preserve the Arctic as an area of low tension and constructive cooperation, Parliament said in a resolution adopted on Wednesday, underlining the the EU’s commitment to long-term sustainable and peaceful development of the region.
Gender-based violence and abortion rights
MEPs adopted a report calling for urgent measures to protect victims of domestic violence in custody battles. The report highlights the surge in violence by a partner during the pandemic and the difficulties in accessing support services and justice. Members also adopted a resolution expressing solidarity with the women of Texas and all the others involved in legal challenges regarding the recent restrictions on abortion.
Road safety
Road safety measures, including a 30 km/h speed limit in residential areas and zero-tolerance for drink-driving, are the way to reach zero deaths on EU roads by 2050, MEPs said in a resolution adopted on Wednesday.
EU-US relations
In a resolution on future EU-US relations, MEPs called for better coordination on China to avoid tensions, but also advocated strategic EU autonomy in defence and economic relations.
Cyber security and artificial intelligence
A common cyber defence policy and substantial EU cooperation on cyber capabilities are among the key issues needed for the development of a deeper and enhanced European Defence Union, MEPs stressed in a report adopted on Thursday. In a separate report, they demanded strong safeguards when artificial intelligence tools are used for law enforcement or border controls in order to prevent discrimination and ensure the right to privacy.
Belarus
Parliament urged EU countries to further strengthen targeted economic sanctions keeping the focus on the  main Belarusian sectors, in a resolution adopted on Thursday, and expressed solidarity with Lithuania, Poland and Latvia, as well as other EU countries targeted by the regime’s attempts to direct migrants and refugees towards the EU’s external borders.
Compliments of the European Parliament. 
The post EU Plenary highlights: energy prices, tax revelations, Arctic first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Main results
EU environment ministers met in Luxembourg to exchange views on the Fit for 55 package, prepare the COP26 climate summit and discuss the new EU forest strategy for 2030. The Council adopted its position at first reading on modifications to the Aarhus Regulation. Ministers also discussed the current surge in energy prices.
COP26 climate summit
Ministers started the meeting with a discussion on the preparations for the United Nations Framework Convention on Climate Change (UNFCCC) meeting to be held from 31 October to 12 November in Glasgow (COP26). The Council adopted conclusions setting the EU’s position at the meeting.

The world is currently not on course to keep global warming below 1,5 degrees. Many more collective efforts are needed to keep our planet’s temperature within safe limits. In COP26 the EU will call on all parties to the Paris Agreement to come forward with ambitious national emission reduction targets and for developed countries to step up international climate finance. With the conclusions adopted today, the EU not only has the willpower, but a strong mandate to lead the discussions in the right direction – the direction of protecting the planet for the benefit of all and standing on the side of those that are most vulnerable to climate change.
Andrej Vizjak, Slovenian Minister of the Environment and Spatial Planning

The conclusions call upon all parties to come forward with ambitious Nationally Determined Contributions (NDCs) and recognise the need to step up adaptation efforts collectively.
The Council recalls that the EU and its Member States are the world’s leading contributors of climate finance. The conclusions reconfirm their commitment to step up the mobilisation of international climate finance and invite other developed countries to scale up their contributions.
The Council also lays down the EU’s position as regards the finalisation of the Paris Rulebook, in particular the voluntary cooperation under Article 6 and a common timeframe for NDCs.

Council sets EU’s position for COP26 climate summit (press release, 6 October 2021)

Fit for 55 package
EU environment ministers held a first formal debate on the Fit for 55 package, with a particular focus on initiatives that fall under the remit of the Environment Council. These proposals aim to amend the:

EU Emissions Trading System
Effort Sharing Regulation
Land use, land-use change and forestry Regulation
Regulation setting CO2 emission standards for cars and vans
and to establish a new Social Climate Fund

Due to the cross-cutting nature of the package, we can expect discussions to be complex and – realistically – to take some time. In general, Member States welcome the ‘Fit for 55%’ package as it aims to provide the concrete means for the EU to fulfil its increased climate ambition. Understanding the interlinkages between the files plays a vital role in assessing whether and how all parts of the package contribute to an overall balance.
Andrej Vizjak, Slovenian Minister of the Environment and Spatial Planning

The Fit for 55 package aims to bring EU climate policies into line with the EU’s objective of reaching climate neutrality by 2050 and its target to reduce net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
The package consists of a series of closely interconnected proposals either amending existing pieces of legislation or establishing new initiatives across a range of policy areas and economic sectors.
The debate focussed on the balance and interlinkages between the various proposals, as well as on their contribution to the EU’s increased climate ambition. Ministers gave their views on the distribution of efforts between and within both Member States and different economic sectors involved, and on the impact of the proposals on citizens. The debate addressed in particular the extension of emissions trading to buildings and road transport.

Fit for 55 package – exchange of views

EU Forest Strategy
Ministers held an exchange of views on the new EU forest strategy for 2030. The strategy is one of the flagship initiatives of the European Green Deal and builds on the EU biodiversity strategy for 2030. It aims to contribute to achieving the EU’s climate and biodiversity objectives.
The debate focussed mainly on whether the new EU forest strategy reflects the Council conclusions on the Biodiversity Strategy for 2030 and whether it provides a good basis for the EU to lead globally by positive example on sustainable forest management. The Council will adopt conclusions on the new forest strategy in the Agriculture and Fisheries Council in November.

New forest strategy 2030 – exchange of views
Council adopts conclusions on the biodiversity strategy for 2030 (press release, 23 October 2020)

Access to Justice (Aarhus Regulation)
The Council adopted its position at first reading on an amendment to the Aarhus Regulation on access to justice in environmental affairs. The adoption of the Council’s position follows a provisional agreement reached with the European Parliament in July 2021 and is the final step of the adoption procedure.

Aarhus Regulation – Council adopts its position at first reading (press release, 6 October 2021)

Other matters
At the request of Greece, Spain and Poland, ministers discussed the current increase in energy prices.
The issue has been put on the agenda of the European Council on 21-22 October. The Commission will come forward with a Communication on the rising energy prices ahead of the discussions in the European Council.

Information from Greece
Information from Spain
Information from Poland

The Commission informed ministers about a report on the implementation of Regulation (EU) No 528/2012 concerning biocidal products. Belgium provided information on the need for a coordinated action against PFAS and Germany informed ministers about a ministerial conference on marine litter and plastic pollution in Geneva, co-convened by Ecuador, Germany, Ghana and Vietnam with support of the UNEP Secretariat.
Compliments of the Council of the EU.
The post EU Environment Council, 6 October 2021 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Humans should supervise AI systems and algorithms should be open
Ban private facial recognition databases, behavioural policing and citizen scoring
Automated recognition should not be used for border control or in public spaces

To combat discrimination and ensure the right to privacy, MEPs demand strong safeguards when artificial intelligence tools are used in law enforcement.
In a resolution adopted by 377 in favour, 248 against and 62 abstentions, MEPs point to the risk of algorithmic bias in AI applications and emphasise that human supervision and strong legal powers are needed to prevent discrimination by AI, especially in a law enforcement or border-crossing context. Human operators must always make the final decisions and subjects monitored by AI-powered systems must have access to remedy, say MEPs.
Concerns about discrimination
According to the text, AI-based identification systems already misidentify minority ethnic groups, LGBTI people, seniors and women at higher rates, which is particularly concerning in the context of law enforcement and the judiciary. To ensure that fundamental rights are upheld when using these technologies, algorithms should be transparent, traceable and sufficiently documented, MEPs ask. Where possible, public authorities should use open-source software in order to be more transparent.
Controversial technologies
To respect privacy and human dignity, MEPs ask for a permanent ban on the automated recognition of individuals in public spaces, noting that citizens should only be monitored when suspected of a crime. Parliament calls for the use of private facial recognition databases (like the Clearview AI system, which is already in use) and predictive policing based on behavioural data to be forbidden.
MEPs also want to ban social scoring systems, which try to rate the trustworthiness of citizens based on their behaviour or personality.
Finally, Parliament is concerned by the use of biometric data to remotely identify people. For example, border control gates that use automated recognition and the iBorderCtrl project (a “smart lie-detection system” for traveller entry to the EU) should be discontinued, say MEPs, who urge the Commission to open infringement procedures against member states if necessary.
Quote
Rapporteur Petar Vitanov (S&D, BG) said: “Fundamental rights are unconditional. For the first time ever, we are calling for a moratorium on the deployment of facial recognition systems for law enforcement purposes, as the technology has proven to be ineffective and often leads to discriminatory results. We are clearly opposed to predictive policing based on the use of AI as well as any processing of biometric data that leads to mass surveillance. This is a huge win for all European citizens.”
Compliments of the European Council.
The post Use of artificial intelligence by the police: MEPs oppose mass surveillance first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.