 The next topic on the agenda is the second consultation that was published recently, namely on Uribe or fallback rates for cash products. And also here there will be an opportunity for questions afterwards with an enlarged panel. But we are starting with Christian Gau, Anna Kuzhevnikova and Neil McLeod, of respectively Deutsche Bank Generali and Erste Gruppe, who will guide us through the consultation. Christian, I give the floor to you. Anna, who wants to start? I'll give it a start and we're going to hand over, I think even several times. So hopefully everybody can hear me and see me. It's always the question, the key question. Can hear and see you perfectly. Okay, wonderful. Thank you very much and welcome to all the participants, all the participants of this roundtable. I will, Anna, Neil and myself will lead you through the presentation and then we'll kick off with a Q&A afterwards. So the objective of this consultation paper was predominantly, or was twofold actually. So on the one hand, the idea was to have a look at the EuroSTR-based term structure methodology assessed against a list of CLEAT criteria to be used as a EuroRibber fallback rate. So and the CLEAT criteria is one of the most important elements here because with that consultation, obviously we're trying to achieve a neutral look at the possibilities at pros and cons of each of these methodologies in order to provide alternatives to the market participants and allow them to provide us with their proper feedback of what their preferences are. That's what we're after here. The second element of this consultation is the so-called spread adjustment methodology. That spread adjustment, we'll look at this in a bit more details over the course of the next minutes of this presentation. But basically this is the methodology that allows to align EuroSTR and EuroRibber given that they are looking at different tenors. Obviously also different risks are associated and the methodology here is aiming at providing compensation and therefore allowing to address a potential value transfer that would otherwise be relevant. So therefore at the end of the day we're able to propose to the market also to conventions in order to calculate the corresponding compounded term rates. That is another element which will be closing off at the end of the presentation. So the three main considerations relevant for this consultation and for the work in the corresponding working group has always been that the EuroRibber fallback rates must be based on EuroSTR that they cover cash products because we're going to have a look at the derivatives but basically from our point a few derivatives are covers by the works that has already been performed by ISTA and has been now feeding into the supplement 70 of the 2006 ISTA definitions as well as various amendments to clarify implications on certain products. We will have a look at this in a few minutes and the third element was that we would also always want to acknowledge the workers that has already been done in the different market associations, the recommendations in other risk-tree rate working groups in other jurisdictions as well as of course the FSB recommendations. All of that was to be included in the paper and I think it clearly is. Important here the paper is based on the current legislative framework so there is it should be noted here that the European Commission published a proposal for an amendment of the BMR which will address also and designate or it's aiming at designating replacement benchmarks so what we're looking here is basically the current framework and it's not tries to incorporate any of these changes that will come up from there. So on page 16 so let's move on to page 16. Yeah let's start with the methodologies so the term structure methodologies basically differentiate between backward looking and forward looking methodologies that we analyzed and in this presentation here I will only look at those alternatives which we finally settled for and therefore disregard any of the other methodology alternatives that the working group definitely also looked at you will find that in the consultation but not in this presentation here due to timing. So the backward looking term structure what does it actually mean I think most of you have been looking at this already in detail but only a quick review the base case that we're always looking here is that we're looking at an observation period as well as an interest period that refers to the past instead of the future as we typically find to today when we're talking about you write about or all the different libraries. So the normal case or kind of the standard case would be that observation period and an interest coupon period is the same however the start of kind of all developing all these alternatives is basically the fact that this is very very difficult and in terms of operationally very difficult and provides a number of challenges to build this into the workflows that you find within the banks today. So therefore what are the alternatives how could we address these issues that basically occur from an interest payment to be made for a period basically at the end of the of the coupon period so on the same day so it's the same day interest period in interest payments so to say. So what were the alternatives that we have threefold we have we're dealing with the potential we're dealing with payment delay a look back and the last reset so what does that actually mean the first alternative so payment delay and look back are looking or are applying backward looking in the rears patterns whereas the last recent method looks at it in advance so what does it mean payment delay means that which would simply only delay the interest payment itself so observation period and interest period still the same we're just delaying the interest payment actually so at the end of a majority of a deal that could lead to the funny effect that you have a nominal payment on one day and the interest payment on another day depending on the number of days that you choose the payment delay to be you see that that contains kind of some operational issues or that they say could potentially trigger some operational issues right away due to now these two payments potentially been happening at a different date an alternative for that and that is the alternative that for example Easter choose in the default fallback methodology is a look back period where you know slightly detangle observation period and interest period so you're looking at an observation period that is to refer to what is there has been deciding in terms of the number of days two days in the past yeah so your observation period starts two days before before the interest period actually so and that gives you the possibility to deal with the operational issues of the corresponding settlements then the last method that we're looking at here today in terms of backward looking methodologies term structure methodologies is the last recent method that is a methodology that even though it refers to an observation period that is in the past it is not the same observation period as the interest period so therefore it allows you to use or to refer to a period in the past and apply it to an interest period in the future so therefore you can determine an interest rate in advance which is an advantage which will be focused on in a second but you're looking at an observation period in the past still so therefore it tries to combine kind of the pros and cons of these two different approaches yeah forward looking terms such as I will pass on to in a second to Neil in order to cover that let me just quickly quickly and we therefore move only temporarily to page 17 we will return to page 16 when we look at forward looking methodologies again however on page 17 what you find is now the way that we looked at these term structure methodologies systematically so the key criteria that we developed the criteria that you find in here is you find you find it listed on the left side here that is robustness and availability what does it actually refer to robustness and availability refers to whether a methodology or kind of yeah methodology is anchored in an active and deep and liquid underlying market as well as or how it would have worked in more adverse market conditions the criteria actually refers to the methodology immediate and the daily availability of the market participants so therefore it kind of tries to capture is this is that a stable methodology suggestion then the operational ease that's I think I referred to that already when we were talking about well how do we actually deal with an interest payment that happens at the end of the end of the of the interest or the payment that happens at exactly the end of the interest period so that is an operational issue so the question here is well what operational implications do all these terms of structure methodologies have in terms of how easy is it to implement in IT systems what are the skills and knowledge necessary and how difficult it is to to change all the corresponding procedures client acceptance is the next assessment and here we differentiate between professional marketplace corporates and small and medium enterprises and consumers I think is important to differentiate between these because you see already in the results that we have here categorizing four different four different color codes I'll lead you through that in a second the different customer categories have different intricacies they are they are they have different requirements and also different possibilities whereas professional market players would probably probably do not have an issue with the operational challenges of backward looking methodologies SMEs or consumers definitely have limitations or sometimes we even face regulatory or consumer protection restrictions that sometimes need to be looked at in a different way for this customer class so client acceptance therefore is an important element of the of the assessment of the term structures then the hedging ease and hedge accounting impact that's actually very important at the very moment in time where you're looking at the relationship between hedging on the one hand and the corresponding underlying transaction on the other hand should you come to the conclusion that there is a large discrepancy between these two between the hedge as well as the underlying transaction we might have an impact or might face an impact on hedge effectiveness in term in when you look at hedge relationships within hunter portfolios of large for example of mortgage loans versus the corresponding hedges so for what we then also looked at what the working group focused on for quite intensively is what is the what is the impact of that and what is can we address any potential discrepancy between the hedge on the one hand and the underlying transaction on the other hand by the introduction of basis swap and basis swaps and what would that mean as a direct consequence for the hedge effectiveness let's not go into too much details on that but you see it's very important definitely to look at the impact of these methodologies on hedging and the corresponding accounting impacts everything that is not covered then let's say in a hedge accounting has been looked at when dealing with the other accounting impact category last but not least we do have the risk management category that means what we're looking here is clearly how easy it is is it to apply risk management of using these different term structures and what are the implications and what is the impact on IT systems and the corresponding risk evaluation models when dealing with such a suggestion last the consistency with other jurisdictions it's an important element because your str and your rival is not alone or is not should not be treated in a completely different and separated way so we should as far as possible trying to align ourselves to other jurisdictions and what they have been or there's the terms to the methodologies that they have been suggesting and looking at yeah let's go one step back and have a look at the same type of analysis for the forward-looking methodologies I pass on to Neil in order to cover that segment thanks very much Christian and so Christian very well described the the backward-looking methodologies that I think everyone on the call will have some understanding of and what's the difference with the forward-looking methodology and the forward-looking methodology is really about the expected interest rate rather than the actual interest rate so it's trying to measure at this point in time what that rate is is going to be rather than what it actually is and that fundamentally starts causing some challenges because it means that you can't simply take the rate that is there or the rates that are there and compound them which is why a forward-looking rate whilst optically looks easier from an operational standpoint actually has an awful lot more challenges when you look at the methodology so how or what can you use to try and measure that expectation basically the derivatives market so you in some fashion have to reference the derivatives market in previous consultations by the working group we concluded that the OS swap market was the the most sensible market to to reference and there you immediately have the challenge of you know what data should you use exactly how it should be measured and and then what are the specific market dynamics around it and the working group looked at three different important points really in terms of what was necessary for a forward-looking rate methodology and as been already mentioned by by previous panelists we need to have this successful transition from Ionia to Esther and in the swap market including the the significant movement of liquidity which which we would still expect and secondly it needs to then be referenced based on a transparent and regulated underlying derivative market trading for example on an mtf and then you really need to have sufficient sources of data to capture most market activity whether that be real underlying transaction data and or other options that have been considered in the past and now the working group has has been or has had presentations from five different potential administrators who have shown an interest in in providing this rate and but as yet there is no rate available and I think if I just just run through this this table and briefly with regard to forward-looking rates and why did we conclude what we concluded with within these traffic lights so and the most critical topic I think is the robustness and availability of a forward-looking rate as I said at the moment for the euro there isn't one available and for for sterling and hopefully one will be available at some point early next year and there's obviously some beta rates already available and one additional challenge within the the the euro zone and and specifically the yoni or or ester derivative market is there is a limited number of counter parties which really dominate that market and in terms of providing liquidity in terms of volumes that go through this would really need to change or or adjust and for for it to become and more robust or or viable and I think as well as I've already mentioned the the the challenge is then making sure that really the market data is available in some fashion whether that be transaction based or something else and but maybe the most important point and just to remind everybody of the statement from the Financial Stability Board and that clearly a backward-looking rates will be more robust than than any of these forward-looking rates that could be available and so where it is possible and the backward-looking rates should be used and now going through just that the highlights of of the other criteria we considered and obviously the big advantage with this forward-looking rate is that it's very very similar in logic to current your eyeball and so operational ease and and client interceptions and it is clearly green and there are additional challenges with regard to hedging whilst the the forward-looking rate that a cash product could in theory reference and would be there the derivative would still reference the backward-looking rate which is basically still built from the same market but creates a limited amount of basis risk now this basis risk and in theory could be hedged and whilst it may create and also hedge accounting issues and a basis market could could develop here to be able to manage that minor risk but it would be very one-sided and and isn't available certainly at the moment which which is why we we concluded as a working group that it would be feasible with some minor changes or drawbacks other accounting impacts we see as limited really again because it's a similar source of methodology and the risk management impacts similar sort of issues with regard to this additional basis risk that that we'd be embedded between and the derivative and the cash products if that cash products referenced a forward-looking rate and then finally with regard to consistency with with other jurisdictions asset classes well it's actually a similar picture and what we see elsewhere in terms of other working groups what what they have seen is that there are a number of challenges creating these these forward-looking rates but they see a clear need for for certain asset classes to have this available which we will talk about more in the following slides i'll pass back to to you christian maybe just to summarize on the backward-looking methodologies yeah definitely so what you when you go through the same that Neil let us through with respect to the forward-looking methodologies then i think Neil you already mentioned that from a robustest point of view obviously there is some advantage with the backward-looking methodologies and that applies to all the three kind of alternatives that we looked at so payment delay look-back period as well as last reset then with respect to optional operational ease i think that is where what i what i already mentioned kicks in this is therefore we are looking we're always looking at the fact that you need to settle the interest payment actually very close to the end of your observation periods so the number of days difference between your your the the the end of your calculation period and the moment that you have to settle is always very close and provides challenges from an operational point of view and that is true not only for banks but also for the corresponding customers so therefore we looked at that so the operational ease of these methodologies as still feasible but with some or some minor challenges for sure and that would be true for the last reset period more than it would be for the payment delay in the look-back period so looking at the client acceptance i already touched upon that as well for professional market players it should actually not be an issue to accept backward-looking term structure methodologies when it comes to corporates it becomes having the picture becomes slightly different because you you still have that communication issues with these corporates already in terms of the what rate is actually been used and when can you communicate that information and how can you settle that with these corporates so it becomes already an issue so therefore the client acceptance we believe for corporates in terms of the payment delay so those two methods which looks at which applies in arrears method methods would only be feasible with some or some relevant changes or drawbacks when it comes to consumers to the end consumer then it's i think ultimately clear that you need to address consumer protection issues and those i think that's what we found out sometimes do not allow you to not let or not inform the clients of the rate that you apply to a certain interest period in advance so and that is therefore that's therefore a restriction which is not a restriction but let's say a limitation which applies here which need to be taken into consideration carefully which let us to believe that from a with respect to the payment delay methodology it is quite questionable whether you can apply that for this type of customer for this customer group and with respect to the look back period which obviously provides a slightly better approach and is also in line with what is there has been determining for the corresponding hedges it should be feasible with some or relevant changes the last reset methodology in that particular case is actually feasible so therefore the most appropriate relevant only looking at client acceptance that is just simply because you actually determine that rate now in advance even though you refer to observation period in the past however you address that particular issue that i've just mentioned so then for hedging easter accounting impacts clearly the last reset methodology provides the kind of the biggest challenge because in that particular case you have now you separate basically between observation period and interest period so it's basically you the observation period is the interest period it's a piece that say the interest period as of before predecessor basically and that clearly indicates that those two periods do not relate to each other anymore in a way that you would typically assume let's say the observation period and the interest period relates so therefore it is important to understand here that that causes issues with respect to hedge accounting and could therefore we classify this as the feasibility as questionable however the other two methodologies in this respect do not provide the same challenges and that is i should probably kind of mention that here that the analysis which we did on hedge effectiveness i think what i think the two important things to mention here is clearly that for the inclusion of any measures to address the difference between coupon between the observation period and the interest coupon period by the use of basis for example it is important to understand whether that is a direct consequence of the iber reform as a first as a first precondition and the second precondition whether economic equivalence is is given and that means equivalence before and after the reform should both be in place and we believe based on the work that we're doing here and based of the recommendations that hopefully we'll be able to give and to provide after the consultation that should actually form part of the assessment of economic equivalence so it is therefore our assumption that these two methodologies will not have as much of an impact on hedging and hedge accounting and therefore they are provided feasible they are to be treated as feasible methodologies other accounting impacts very much same direction yeah so and therefore i will not focus on it too much on the risk management impacts why do we have a questionable feasibility for the last reset this is simply because it's more difficult to hedge you now have situation where your as we said before your observation period is in the past and your coupon period is in the future so they deviate from each other you definitely have to apply you have to treat this from a risk management point of view in a different way you need to apply hedging most probably using basis swaps however basis swaps of the nature that we're looking at here might not are not available yet and a market will have to be developed so all of this whether this all of this will be available is at least to some extent questionable that's why we look at this we believe that this is the feasibility of this is questionable and with respect to the consistency with other jurisdictions i think is the look back period of course is important to note here because that is the most feasible option simply and clearly because it is widely accepted already and that goes back to the work that is there has been performing by choosing this methodology to be their default term structure the default foreback methodology so looking at that obviously that clearly indicates that i say that started i say or that that took care that there this is to be treated and seen kind of as a default standard and therefore going for look big period as term structure methodology clearly has the advantage of of that being in line with what we saw in other jurisdictions and as a classes like derivatives for example yeah that is the analysis of the the backward looking methodologies in terms of these key criteria and in the next section we will lead you through what we call the use cases so how does that apply to the different product classes now and for that i hand over to ana thank you christian thank you so based on on on the set of different criterias that we let's come back to the slightest the working group analyzed the applicability and viability of different methods or methodologies backward looking methodologies or forward looking methodologies for different different products and we try to define a quite extensive list of different assets and products for which we try to understand which of these methodologies can be proposed as a viable viable for a back rate if if you look at the mapping of different colors presented by nail and christian on the previous slide so basically the conclusion considering first of all the availability of the rate and also the assessment of of the rate by different criteria the conclusion was that for the major part of the products the backward looking look back period term structure could be considered as a viable and the most appropriate fall back to be proposed here i would like to highlight the main reasons and elements why um that are quite common for many products and that i would like to to highlight uh on this slide first of all the backward looking look back period allows still to have a quite good match between the interest period and observation period of course we are going to have a difference in terms of the look back period in terms of the look back period days but it still provides a good approximation in good match especially if you compared to the last reset method on the other hand the the look back period itself allows market participants to perform all necessary calculations in terms of payments in terms of settlement in terms of interest calculation or reconciliation and so on what we can observe now in the market we have already some products in particular bonds or loans issued with based on this methodology and what we can see that the look back period varies from two days to five days of course five days allows again i mean to perform more easily all necessary calculations and to have more time to perform all necessary considerations but on the other hand two days is much more in line with what is proposed for ease the derivatives and this is an important element to be considered because it should help to avoid or to reduce any hedge and effectiveness and actually to be fully matched with this approach proposed as a fallback for this kind of derivatives in general i would like to anticipate because this section is going to be covered a little late that as a working group didn't propose any recommendation or any any look back period in general because on one hand we believe that this is something that can vary based on specific product needs on specific market sector requirements and on the other hand it's this is something that again i mean can can vary based on even on specific market participants needs whereas a certain product for example must be hedged or instead the hedging effectiveness has much less relevance compared to to any other assets to any other product so this is something that is covered in the consultation paper but on which we don't ask for any feedback and we don't plan to come up with any recommendation another element to that was i already mentioned is related to to the hedging effectiveness so the look back period term structure methodology is the same that was proposed by by isda and this has a quite significant weight for assets or products that are used for hedging or that that must be must be hedged another element to be highlighted here is a consistency with the other restrictions and this is really important as neil and christian were mentioning in general we as a working group we try to to analyze and to identify possible proposals in order to not to increase any fragmentation in the market so for the market to be transparent and easy to operate as a fragmentation risk must be mitigated to to the extent possible so this is an important element to be considered on one hand to for example to be aligned with what is proposed for what is the derivatives on the other hand should help to reduce as a requirement operational requirements for IT systems any new implementations any any any changes that these fallback rates might require in terms of operations or procedure adjustment and so on so this is another element to to be considered and in order to also to avoid to have any significant risk management impacts because again i mean one of the requirements that was had been already communicated in the past through a different report dedicated only to the risk management actually was this one so the necessity not to introduce too many fallbacks and to try to reduce any significant variability between between them so these are the main elements that actually led to conclude that the backward-looking loopback period jump structure could be considered as the most um viable as the most appropriate fallback rate to be proposed for many products we can go to the next slide and here we're talking about in particular corporate lending debt securities and also a part of transfer pricing models used by most financial institutions um then the working group recognizes that for some specific products or for some specific assets due to their intrinsic characteristics or due to specific use cases and here again i mean if you if you look at the consultation paper you can find a quite good description of of different aspects especially in in the section dedicated to to the list of criteria presented before and then of course also in the use case section as well so based on on the criteria and based on what we have analyzed for different products what is required by the market house and function and so on the working group has identified some cases in which a different methodology compared to the loopback jump structure can be required and this part is partially covered on this slide and then in the next slides here before passing the word to Cristian for derivatives I would like to highlight the first case is related to current accounts and as you may know the current accounts and the market practice related to current accounts is quite differentiated across different banks across different countries or the european zone and here based on the fact that actually the balance of the accounts changed from day to day and the interest can be calculated only at the end of the interest period not even before so even knowing the rate in advance this calculation cannot be done for the reason the working group considered that the payment delay could be the would be the better option to be adopted for current accounts but not the loopback period and this is the first exception that we have and on which we're asking also for your feedback and the consultation page for derivatives instead please Cristian yeah only a quick I already mentioned it only a quick summary here originally we had in derivatives included into the consultation but given the developments on the ISTA side with the respect to the development of the fallback measures but also the continued guidance they provided on the applicability of that to different product types which we were dealing with at the very beginning and were trying to address we didn't see any need for further recommendations and that's why as I mentioned already at the beginning derivatives are not included in the consultation right now so I think that those have been already covered so I think we move on therefore to the forward-looking or yes thank you yes thank you Cristian so let's move to the next two slides that are quite quite interesting because there was a performed a specific investigation on products that may require the forward-looking term structure methodology so for which we believe the forward-looking term structure methodology will be the most appropriate choice and then here I leave the road to Neil yeah thanks very much Anna so I've seen one or two questions that have already come up on this and I will then try and answer them and through the the next couple of slides so there was clearly several product groups where we felt that the rate needed to be known in advance so so so we concluded that for for mortgages consumers and SME loans and for trade finance and for export and emerging markets finance products and knowing that rate in advance was necessary now that in itself doesn't mean that you need to have a forward-looking rate because remember we have one backward-looking rate methodology that would also be applicable here the the last reset so what was concluded in terms of the recommendation and is to introduce the forward-looking rates and for a waterfall structure and so that we would have a backward-looking term structure methodology which would be the the last reset and as a second layer of the waterfall in the situation that a forward-looking rate is not available and which clearly has has some some challenges around it still so what we needed to construct and what we looked at within these case studies is number one to say why is that rate needed to be known in advance and then secondly what are then some of the challenges with the last reset methodology because we concluded yes it would be possible but it has some additional headaches around it so if we could go through to the next slide please where basically we've we've kind of summarized what the critical issues were so for mortgages consumer and SME loans which we felt were in the end very similar in terms of the the issues to consider and the most important point that we considered and is is part of the questions that are there as well is what is a sufficient period of notice that the end user needs to have so and you can see it within the the consultation we did various analysis of legislation so consumer protection legislation across various jurisdictions within the eurozone if I were to summarize it I'd give you two clear messages it's either the rate needs to be known at the start of the period or if it's not known at the start of the period and there should at least be a sufficient period of notice now what isn't generally defined is what that sufficient period of notice should be and so so we considered this as well and and let's take the classic example of a of a retail mortgage because this this this comes up frequently retail mortgage is in in many people's cases one of the most significant cash outflows during the month so we felt from that at a very very minimum you'd want to know it at the start of the month and in reality you'd want to know it at the start of the interest period so that that individual can can better manage their cash flows now the logic is actually similar when you move to other products and and also other client groups which is why we felt something similar for the SME group I think additionally for SMEs which is the the second bullet point there is that a lot of financing is is done based on a discounted cash flow basis so you've got that that future cash flow that needs to be discounted to today and if you're doing that you need to know what that rate is at the start of of the period and so again you need to know that rate in advance and we looked at some other aspects as well that had come up in the past with regard to is there any sort of problem with the using a compounded rate you know compounding isn't itself interest on interest and there were some concerns about certain jurisdictions with within the eurozone and the conclusion was within the working group that this risk was was was limited and if the rate is then this backward looking rate is then published by the the central bank so by the ECB that risk is is even lower and what we also considered is kind of the whether there's any major difference in terms of the understanding of the rate conceptually I think people wouldn't necessarily understand how your eyeball is constructed in itself and these methodologies if you went into more detail they become quite complex especially the forward looking rate in that regard and we didn't see such a significant difference but but clearly it is easier to understand somehow the backward looking rate where you've got then simply compounding as a logic so that was one group clear client group where we said there needs to be some form of notice in advance or at the start of the period I really other groups where we thought this was was was relevant and trade finance and an export and emerging minor emerging market finance and again with regard to trade finance it was similar to my example with the the SME businesses where you're talking about discounted cash flows and anytime you're talking about discounted cash flows you really need to know the the interest at the start of the period with regard to emerging market finance actually it incorporated everything I've discussed somehow and more complexity and often the the the notice period from from an operational standpoint needs to be much much longer and 30 days or or more and the the environment can I can I briefly interrupt yeah I think we need to slowly move towards the ends of the of the panel part and then switch to the q&a so so I'll I'll thanks thanks willing then I will speed up I will speed up and and pass on quickly yeah so and then briefly and that's the reasons why we need a rate in advance last reset has a number of problems though so it can be used but feasibility for tenors longer than three months is a challenge the economic mismatch is is far far higher if you say referencing six months nine months or even 12 months um period there are accounting issues which actually is similar to to to the mismatch in terms of economics with regard to the time value of money and SPPI test and systems and model requirements are far higher as soon as you're looking or using a backward looking rate and remember that's far more significant when you're talking about for example retail products where you're then having to adjust core banking systems and then there is hedging cost and complexity and using the derivative market with regard to the last reset methodology simply simply because there is again some level of of of basis risk which can increase the cost at the very minimum for the end consumer so I've summarized there I've sped up a little bit and I think now I pass back to Anna thank you thank you so we can go to the next slide and here there are also other use cases or other products for which we we propose different different methodologies the first one is related to secure securitization here we you may know that there is a strong relationship with with the underlying assets and so without going into details very briefly what the working group believes is that the best approach is to apply the same fallback rate used for the underlying assets so it means that in case when the underlying the fallback rate for the underlying assets is based on the backward looking lookback period construction methodology the most suitable fallback measure to be applied also for securitized products would be the same so the backward looking back lookback period structure instead in case of applying the forward looking term structure methodology for such products as mortgages or small medium enterprise loans and so on so basically the products just covered by nail in this case the most appropriate fallback rate would be to maintain the same rate so the forward looking term structure methodology and always as it was it has been already highlighted through through the waterfall structure a quite interesting point is related to to investment funds as you could see also in the consultation paper we haven't reached any agreement or any proposal regarding the investment funds and for for this kind of industry or sector it would be important to have your feedback of course investment funds use the rival rate for mainly for two purposes the first one buying or selling investment products referencing the rival and on the other hand the rival rate is used also for benchmarking or for performance calculation and so on so the main focus is on this second case and there are two actually elements that were highlighted by different participants on the working group regarding the use of the benchmark within investment funds industry the first one is to to guarantee that the rate is representative so that the fallback rate is going to be representative of the market and this is something that is covered by by the consultation paper launched by the ECB and also by by the part related to the conventions of this consultation paper and the second element is more related to again I mean to to the consistency to the consistency of the fallback rate to be applied to be used across different asset classes or different jurisdictions so these two criteria were highlighted as the most important ones for the investment funds industry but again I mean please we really hope to have your feedback for for this part of the consultation paper number two to be able to come up with a clear proposal and recommendations so we can go to the next slide and the slide just summarizes that what we have presented you you may see is that actually for many products we propose to use the backward working group back for the trade and for for a quite significant part of of of the products instead we believe that the forward looking trade can be really necessary to to have in order to to due to specific product characteristics or due to specific use cases or client client needs we can go ahead and here there is a part dedicated to the spread adjustment methodology as christian was explaining before we have two parts actually was a fallback rate the first part is related to the rate itself based on the Eurostar rate and the second part of the fallback rate is related to the spread and spread spread adjustment to to be applied especially for legacy contracts or legacy books please christian yeah I try to be very quick with that I think there is less discussion around that part of the methodology from our point of view there seems to be more consensus on the use of the same methodology that is also being applied by the ISTA default deriber fallback which is the historical mean median approach to spread adjustment and in general that should applying that the the the advantage doing that is that it reflects current market conditions it allows not to dive into any cliff effects it considers the tendency of interest rates fluctuate around long-term mean the information is already available and it is also less impacted by temporary market distortions given that you're looking at the past and at a quite a lengthy period so therefore we saw that it is broadly that this methodology is broadly accepted and hence we have included it also of course in form of questions into the consultation but we have limited therefore can the suggestions around that from our point of view accepted methodology so I try to limit it as much as possible back to you Anna for any thank you thank you please so we can move to the next slide and this is the last the last part was a consultation paper so here we tried to analyze what kind of market conventions should be should be covered or on which we kind of need your feedback so first of all we the working group recommends to use the compounded average methodology that of course compared to a simple average is more representative of of the time value of money and actually this is also this methodology is is proposed by by the cb in its consultation what are the points on which we the working group is looking for your feedback as the first one is related to to the publication of a spread adjustment or all in rate currently as you may know the cb doesn't plan to to publish these two elements of the rate but on the other hand we recognize that for some specific client needs or for some specific products the publication of of the spread adjustment or even of of an all in rate could simplify either the communication towards final clients or either the implementation of these rates in in IT systems and so on so for the reason and you will find more details in the consultation paper we are asking for your feedback another point is related to the inclusion or not inclusion of a floor so application of the floor to to the daily urester value and in this case the working group strongly believes that the daily rate should not be adjusted with the floor but in case when a floor should be applied to eat the most appropriate way to apply it directly to the compounded term rate plus plus spread adjustment because on one hand it's going to be aligned with the current approach applied to the variable rate and and also as a hand of course also should help to to to simplify the introduction of this adjustment again I mean in in IT systems operations due to its consistency with the current practice but again I mean this is something that we we are asking in for for your feedback in the consultation paper then you will find also two other important aspects that we try to to correct explaining also why it's it's important to clarify them and actually whereas these aspects may have certain certain impacts so I'm referring to the last two points of report on this slide there and leaves about to Neil yeah thanks Anna so um briefly compounding the rates versus compounding the balance the main difference between those two methodologies one then takes into consideration um intra within an interest period fluctuations in the the the principal amounts and and the the other doesn't so compounding the rate doesn't incorporate any fluctuations in the principal during the interest period however because it is a simpler methodology and has a wider much wider application we were proposing compounding the rate rather than compounding the balance methodology and with regard to the look back with or without an observation shift remember here we're talking about whilst the rate is is is always shifted and to the to the earlier point is the number of days also shifted so with an observation shift the number of days is also shifted without that also known as the lag approach it's not now there is an important topic and there's a good question on this that I will answer now if that's okay because it then very much relates to our conclusions here so why is the backward-looking look back periods term methodology of rest are different from those recommended for so for insomnia loans being combinatories with a five-day look back without observation shift I think there are there are two answers to that question the first answer is that actually we said that both would be viable alternatives and we're very much aware that from a systems provider perspective and they have already built logic that uses the lag approach but we looked at it at the two methodologies in detail kind of independently from a system perspective included that the observation shift was a was a better logic and was more consistent with the derivative market now our understanding is that vendors are in the process of also being able to deal with the observation shift as well and I think the important point and within the the the consultation is that both would be possible and we see both as really being quite acceptable and that's that's I think the the summary Anna Christian anything to add no nothing to add and I think we've picked up already a few of the questions that we saw on our way to yes yes now I've seen a signature website as well of course I mean we tried the working group tried to to prepare quite comprehensive and holistic consultation paper there are of course a lot of questions addressed in it but again I mean we really it would be really important to have a feedback from a wide range of market participants coming from different sectors or different industries especially concerns the fact that we try to cover different products and different assets and of course I mean with the aim to provide the market who is with the final final recommendations for for a quite I mean a comprehensive list a list of products or topics that we we try to cover it so it's with that I hope I can now switch to the Q&A if I may because we are running out of time yeah so we have we have quite a few people lined up to answer the question I will not introduce them to you because you can see them on the screen let me start by a question that I had and that is what and that is a question to the commission so that would be Tillman or Alessandro how would you deal with the situation where you have multiple replacement recommendations for multiple replacement rates per type of product and when do you expect new legislation to enter into force I don't know if Tillman or Alessandro could answer this question yes hello so you will be sure that we're still here so if there are multiple rates for different products the designation powers do not exhaust with a initial designation it becomes then very granular but in terms of law it is possible to determine a replacement rate for a particular category of products such as debt and then have another replacement rate for another category of products if that is the stakeholder consensus and if the relevant risk-free rate working groups convened by the various central banks in the different currency areas that decide to do so the second question as to the publication of a statutory replacement rate obviously this is very much linked to the trigger the trigger in our expectation would have to indicate exactly when the old rate ceases to be published on a permanent basis and then we would adopt the replacement rate so we would exercise the powers so that the replacement rate can then seamlessly enter into application on the date that the previous eyeball rate ceases to be published so therefore the regulators and administrators of various agencies that can trigger the cessation would have to give sufficient notice between their cessation trigger and the actual end of publications so that we could then do the necessary work to either consult or to transform the recommendations of a central bank risk-free rate working group into a replacement rate that will be an implementing act which will be adopted and then we will make sure that the entry into application of that date coincides of course then with the last publication of the old eyeball I hope that answers the question thank you very much as I hope everyone can see we have a lot of written answers already especially Jav Kess of high and G has been very active let me take one question that has not been answered by him or by anyone yet and that is a question by Frank Sheil and he's asking why does the working group deviate from other working groups regarding the application of a floor who would like to answer that question Christian Anna Neil I'm at the moment to be honest I'm not yeah I would really love to kind of hear more details as to why we believe there is it I think we mentioned this in the conventions section yeah so we have built kind of the question regarding how to incorporate the floor in the convention section but other than that anybody remind me if I'm wrong but we have not made any any any conclusions there if I remember correctly right and William perhaps if I can jump in if you can hear me it's cam I don't know if this is relating specifically for example to the loan conventions that have come out in the UK and the US where it's envisaged that there's daily application of a floor because daily calculations are envisaged and I think where we've come out in the consultation paper is that it is accepted that for international consistency that you might wish to apply a daily floor so it's not that that is sort of said that you can't do that and it has been recognised that there is this interplay with the UK and the US loan convention so I think that's probably aimed at the loan conventions which are catered for in the proposals but if it's something different then Frank please do write an additional question maybe maybe I could add to what Cam was saying so our conclusion was really from an operational standpoint it was simply easier to take the overall period and floor the overall period but again we do state that that both are are clearly possible and within the consultation okay thank you very much another question is asked by Frank Hebeisen and he's asking or he's stating that it is surprising that on page 24 the group suggests two different methods backward versus forward with underlying assets which are both cash financing oriented and he considers this unusual who can answer this question yeah I'm actually looking now it's page 24 and I don't see it going back so I will I will send Frank a personal mail to ask okay what what what does it mean and then we can come back to that very good then Patrick Scholl is asking is it considered as part of the recommendations to reapply the forward-looking fallback waterfall structure for any of the subsequent interest periods I can say that that hasn't that's it's it's an interesting question but it's not something that has been considered within the waterfall logic that we've incorporated so far okay and then I would like to suggest that I take the last question and again we've had many answers also in writing in the Q&A box so please have a look at those so the final question comes from Michael Hammer and his question is the EU is going to mandate a replacement rate how will it determine the most important part namely the spread adjustment methodology will it do so by reference to working group recommendations that would be for the commission I guess yes indeed the answer is a straightforward yes I think as I said in my opening we would expect three elements to be in place the base rate so that is a risk-free rate compounded the adjustment spread to avoid the value transfer when it comes to legacy contracts and the corresponding changes in the contract so how the contract needs to be changed so to accommodate that new rate which by the way will never completely reflect the economic characteristics of the disappearing panel bank rate so there must be also contractual modification consequential modifications to embed that new rate so if these three elements are in place a RFR based base rate and agreed adjustment to avoid undue value transfer and the consequential changes in the contract that's the elements that we would then take to determine a statutory replacement rate if those three elements are not in place it will become very difficult we would possibly if we were minded to act despite that have to put out the base rate the spread adjustment and the corresponding changes for a very profound public consultation and we would then assess the ability to designate such a rate in light of the public consultation answer that we received the stakeholder feedback that is available I have to say that we have a very very clear preference that this work is being done by the risk-free rate working groups and the fact that the European Commission has the opportunity to do its own consultation is really only yet another safety net of the safety net in case there is a particular tenor which is not covered by an RFR recommendation thank you very much and with that I would like to end the Q&A part it's been a bit shorter but on the other hand we've had a lot of questions answered in writing and we will look at open questions remaining to get an answer to to everyone