On the 18th of May, ECB officially announced the implementation of a new reference rate called ESTER (euro short-term rate) until 2020. It is established as the successor of EONIA. This step became necessary, after the European Money Markets Institutes (EMMI) failed to adjust EONIA to the new European benchmark regulation (EU BMR). The new reference rate is based solely on reported and real deal-related transactions of banks (daily basis, unsecured). Additionally, ESTER can serve as EURBIOR fallback in case these reforms are failing as well. The development of compliant Risk-Free-Rates (RFRs) is similar to other currencies (in which the development has proceeded already further).
Reform of the reference rates.
IOSCO published new “Principles for Financial Benchmarks” in 2013 and thus started the regulatory reprocessing of the “LIBOR scandal”. EU implemented those principles with the acts of EU 2016/1011 and EU 2017/1147. Starting in 2020, new contracts are not allowed to refer to non-compliant references rates (classified “relevant”) any longer. Existing LIBOR, EURIBOR and EONIA were classified as relevant benchmarks. However, they are currently not compliant with regulatory standards. Hence, an unchanged continuation is not possible and that is why they need to be reformed.
From May until August ESTER will be tested under market conditions. After this second consultation, further results are expected and might be published at the end of the third quarter 2018. ECB is aiming for implementation of ESTER latest by the fourth quarter 2019. Market participants consider the deadline as too tight, since a smooth transition requires a well established swap market until January 2020.
For further information please read here: https://www.l-p-a.com/risk-quant-consulting/ibor-reform/
Christian Behm, CFA, is with LPA since 2004. He has broad experience in advising banks and has got a distinct capital markets focus. As Partner he is responsible for LPA’s Risk & Quant Consulting Practice and he covers large consulting mandates.