Benchmark reforms (EONIA, €STR, EURIBOR)
The reform of the two main euro area interest rate benchmarks administered by the European Money Markets Institute (EMMI) – EONIA and EURIBOR – is carried out in observance of the Principles for Financial Benchmarks, which were published in 2013 by the International Organisation of Security Commissions (IOSCO), and the EU Benchmarks Regulation, which came into force in 2018.
EONIA (euro overnight index average) is an effective overnight rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market, initiated within the euro area by the contributing panel banks.
EURIBOR (euro interbank offered rate) is the rate at which euro interbank term deposits are being offered within the EU and EFTA countries by one prime bank to another at 11:00 a.m. Brussels time.
After reviewing whether EONIA and EURIBOR are compliant with the IOSCO principles, it has been concluded that if the calculation methodology for the two indices remains unchanged, their use will be restricted from 1 January 2020 onwards.
More information on benchmark rates is available here.
Consultations on €STR and related changes
In September 2018, amid the benchmark reform, the working group on euro risk free rates, for which the European Central Bank (ECB) provides the secretariat, endorsed recommendations to market participants regarding the transition from EONIA to the euro short-term rate (€STR). The ECB is committed to providing €STR by October 2019 at the latest. €STR is based on borrowing transactions in euro conducted by banks and financial institutions (pension funds, insurance companies and assets managers) with financial counterparties (including borrowing from non-euro area agents). The data is gathered in accordance with the ECB’s money market statistical reporting (MMSR). Currently, pre-€STR is published by the ECB.
Transition from EONIA to €STR will start on October 2019 and should be finished by the end of 2021. After the transition period EONIA will most likely be discontinued. To ensure a smooth transition from EONIA to €STR, the working group on euro risk free rates recommended to redefine the current EONIA methodology as €STR plus a spread, calculated as the difference between the underlying interests of EONIA and pre-€STR, i.e. 0.085%.
More information on €STR is available in the table below.
Consultations on EURIBOR and related changes
The EURIBOR reform is currently ongoing. Introduction of necessary changes in the benchmark calculation methodology should make it fall in line with regulatory requirements and thus reinforce its further publication. According to the new hybrid methodology, the benchmark would be calculated based on real transactions data or other market price-setting sources if the former is insufficient.
Financial instruments and contracts that refer to EURIBOR or another IBOR index may serve the construction of a fallback rate. In the case of EURIBOR, €STR, calculated for longer periods, could be used as a fallback.
In July, 2019, the EMMI has been granted an authorisation by the Belgian Financial Services and Markets Authority (FSMA) for the administration of EURIBOR. This also means that the new EURIBOR calculation methodology meets the requirements under EU Benchmarks Regulation and that EURIBOR, based under the new methodology, may be used after January 1st, 2020. More information is available here.
Information on the EURIBOR reform undertaken by EMMI is available here.
|EMMI public consultations|
|October 2015-January 2016||Consultation on the evolution of EURIBOR, consultative questions and feedback|
|March-May 2018||First stakeholder consultation on a hybrid methodology for EURIBOR, questionnaire and feedback|
|October-November 2018||Second stakeholder consultation on a hybrid methodology for EURIBOR, questionnaire and feedback|
Other benchmark reforms
Other benchmarks are currently being reformed as well. The reform includes either changes in the whole benchmarks or changes in their calculation methodology. The following table indicates several other benchmark reforms in progress.
|LIBOR (London interbank offered rate)|
On 1 April 2019, ICE Benchmark Administration (IBA) announced that it had successfully completed the transition of LIBOR calculation methodology to the waterfall approach. The new methodology is comprised of three levels, with the first level input given priority when calculating the rate. The first transaction-based level involves actual transaction data, the second level involves transaction-derived data, and the third – expert judgement-based data. However, IBA indicated that there are no guarantees whether the rate will be calculated after the end of 2021. More information on LIBOR reform and its calculation methodology is available here.
LIBOR – average interbank offered rate calculated for different maturities (from overnight to 12 months) at which banks lend to one another in the London interbank market in euro, dollar and other key currencies.
|SONIA (sterling overnight index average)|
In 2018, after the Bank of England took over the responsibility of administering SONIA from the Wholesale Market Brokers Association (WMBA), the index calculation methodology was changed with the aim of meeting the principles set out by IOSCO. Information on SONIA and changes to its calculation methodology is available here. At this time, the possibility to calculate SONIA for longer maturities is under consideration. More information is available here.
SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions.
|SOFR (secured overnight financing rate)|
In 2017, the US Alternative Risk Free Rates Committee (ARRC) selected SOFR as an alternative to USD LIBOR and there are plans to announce SOFR calculated for longer maturities by the end of 2019. Information on ARRC activities, SOFR and transition from USD LIBOR is available here.
SOFR is an average interest rate at which financial institutions can borrow in the US dollar overnight by providing US Treasury securities as collateral.