The Benchmarks Regulation, the EURIBOR, EONIA and €STR
The ongoing reform of EURIBOR and EONIA under the Benchmarks Regulation (“BMR”) will have not only arithmetic impact on the calculation methods, but will affect also the business, IT and legal processes for instruments and institutions using those important interest rate indices.
What does it mean?
It means that according to the texts in the BMR, EURIBOR and EONIA as they now are, are not compliant with the regulation, and as a minimum should not to be used for new contracts after 1 January 2020 as they are. While on the surface this future obstacle looks easy to deal with, there is a bigger issue – the existing agreements and instruments referring to the different tenors of EURIBOR or to EONIA.
In order to solve the problem and mitigate the associated risks, the European Money Markets Institute (“EMMI”) has proposed a change in calculation method and definition for the EURIBOR to make it compliant and assure smooth transition period. In regard with EONIA, a new index – “EUROpean Short-Term Rate” (€STR), will be published by ECB and it is recommended that the market participants gradually replace EONIA with the €STR for all products and contracts.
What are the main changes?
- First, the applied calculation methodologies – from contribution-based (i.e. quotations) to transaction-based approach for all tenors. In that regard the EMMI developed a hybrid methodology, based on real data as much as possible and enriches it with data from other sources where real figures are not available.
- Second, the tenors – EURIBOR will be calculated and published only for the following tenors:
- One Week (1W),
- One Month (1M),
- Three Months (3M),
- Six Months (6M) and
- Twelve Months (12M).
- Third, the contributors – the conceptual term “prime bank” disappeared and the calculated and distributed by EMMI EURIBOR will represent “…the rate at which wholesale funds in EURO could be obtained by credit institutions in the EU and EFTA countries in the unsecured money market”.
- Fourth, and probably the most important of all – the move in the quotation day for EURIBOR from T+2 to T+1. In other words, the rates of the previous business day are republished and used as EURIBOR rates for that day. And to add more flavour – there is a “intraday re-fixing policy” in case error occurs.
What impacts on the industry should be expected?
The impacts can be separated in two major groups – legal and operational, any of which can be fragmented in more sub-topics and all of them will require efforts and time.
For example, change of the existing contracts and creating new templates will engage primarily the legal departments of the institutions, but the communication and negotiation process with partners and clients will be a task for the relationship officers. At the same time, the corresponding amendments in the IT systems, internal methodologies and procedures for monitoring pricing and revaluation etc will be needed.
When it will happen?
The current timeline foresees that in Q2 of 2019 the “new” EURIBOR based on the EMMI’s hybrid methodology starts, and the first €STR publication is expected on 2 October 2019, reflecting the trading activity of 1 October 2019. However, the authorities, together with the industry are currently discussing to push back the end of these EONIA and EURIBOR rates by one or two years, and the final decision should be known before the end of 2019.