On January 20, 2022, the National Bank of Serbia published the Recommendation in connection with the interest rates which would replace benchmark interest rates which cease to apply (CHF LIBOR and EONIA) (“the Recommendation”). The Recommendation aims to ensure uninterrupted continuity of contractual relationship between borrowers or deponents and the bank, in cases where reference rate, being one of the elements of variable interest rate agreed with the bank, ceases to exist.

Namely, the principle of determinability of monetary obligation in such cases requires, instead of previous variable element (benchmark rate) the application of other appropriate variable element (other appropriate reference rate).

Reasons for issuing the Recommendation

In relation to the announced abolishment of interest rates LIBOR (London Interbank Offered Rate) and EONIA (Euro Overnight Index Average), in February 2021 the EU amended Regulation no. 2016/1011 (Benchmark Reform Regulation) that regulates the interest rates applied in the EU market and thus allowed the European Commission to prescribe replacement rate for key benchmark rates in financial contracts.

Accordingly, in October 2021 the European Commission prescribed the replacement rates for CHF LIBOR and EONIA, which directly apply to all loan contracts (mortgage, housing, consumer and cash), deposit agreements and financial instruments, unless the current agreements, i.e. instruments already contain the agreed reserve rate, or the parties agree otherwise.

The replacement rate specified for CHF LIBOR 1M/3M/6M/12M is SARON (Swiss Average Rate Overnight) compound rate with relevant maturity and with the addition of fixed values for rate adjustment. On the other hand, in case of EONIA rate, rate €STR (Euro short-term rate) has been determined, with the addition of fixed value for rate adjustment.

Content of the Recommendation

Having regard to the above said, the National Bank of Serbia recommended to the banks to offer all borrowers, i.e. legal and natural persons that apply the agreed variable interest rate based on CHF LIBOR, where the agreement does not prescribe any option in case of termination, i.e. impossibility to apply the benchmark rate, to conclude annexes to the loan agreements and instead of CHF LIBOR rate to agree the application of appropriate SARON benchmark with spread adjustment value, whereby the respective maturity of CHF LIBOR is prescribed by the EC Regulation no. 2021/1847.

As for the borrowers whose variable interest rate is based on EONIA rate, the National Bank of Serbia recommended to the banks, in the absence of other contractual provision, to offer all borrowers to conclude a loan agreement annex which would prescribe, instead of EONIA rate, the application of €STR benchmark with adjustable value, as prescribed by the EC Regulation no. 2021/1848.

The banks were also recommended to provide such borrowers with an additional possibility, i.e. to conclude an annex to the loan agreement and continue paying the interest rate based on the latest published CHF LIBOR or EONIA value until the repayment of the loan, and for the borrowers who do not respond to the bank’s invitation to conclude the annex and do not explicitly demand the contract termination, to calculate and apply the interest rate defined on basis of the latest published value of CHF LIBOR or EONIA for the remaining amount of debt.

As for the deposit agreements, the banks are recommended for the agreements with variable interest rate based on CHF LIBOR or EONIA, or where the amount of variable rate depends on the value of these benchmarks, to apply the replacement benchmark rate in accordance with the above provisions of the Recommendation, unless the deponent explicitly refuses the application of these interest rates and terminates the agreement upon receipt of the notice (on reasons for changing the benchmark rate, which the banks are obliged to address under item 7. of the Recommendation).

Finally, on the subject of the aforementioned notice that the banks are obliged to send, the Recommendation stipulates that it shall be drafted clearly and contain the information that the values of new benchmark rates will be published daily in business premises and on the website of the bank, including the source of such information. In addition, the differences between the two offered possibilities (from items 3. and 4. of the Recommendation) for borrowers need to be clearly defined, including an appropriate example, and it is also necessary to outline that the application of such possibilities means that the rate would become fixed and loan instalment unchanged until the repayment, while the application of the replacing rate (from items 1. and 2. of the Recommendation) implies the continuation of regular adjustment of the interest rate in accordance with the agreement and according to the trends of the replacement benchmark rates, which means that the loan instalment will be changed along the repayment period.

This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.