It is great to see the Working Group on Euro Risk Free Rates issue Guidance on EURIBOR Fallbacks for Corporate Lending products on 4 May 2023.  

The corporate loan market has been slow to adopt robust EURIBOR fallbacks, perhaps because EURIBOR is not scheduled to be discontinued or because forward-looking €STR rates (i.e. term €STR rates) were not previously available. Robust fallbacks are a requirement of the EU Benchmarks Regulation and are also recommended for other contracts (such as corporate loans) that are not subject to the regulation. Since term €STR rates (as well as backward-looking €STR) are now available (see EMMI and Refinitiv), the Working Group believes that there is no impediment to the full implementation of their recommendations issued in May 2021.

The guidance does not change the May 2021 recommendations and is applicable to all those involved in EURIBOR-referencing corporate lending products, which includes lenders, borrowers, investors, advisers and law firms.

The guidance clarifies the application of the recommended conventions for compounded €STR and provides further detail on term €STR, which had not been available at the time the May 2021 recommendations were issued. It also reiterates the importance for parties to act now to avoid future market disruption and operational risks, which could arise from the build-up of tough legacy contracts which do not contain workable fallbacks.  

This ties in with the LMA's recent guidance note on EURIBOR fallbacks issued on 31 March 2023 where the LMA confirmed that following the issuance of the Working Group's latest guidance, they intend to consider any documentary changes to reflect the €STR fallback recommendation. We expect that once the LMA publishes the drafting to reflect a term and compounded €STR fallback, the market will adopt the language without much fuss.