Working group on euro risk-free rates
The working group on euro risk-free rates was established to identify and recommend risk-free rates that could serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area, such as EONIA and EURIBOR. This is a private sector working group; the ECB provides the secretariat and attends as an observer only.
The group recommended on 13 September 2018 that the euro short-term rate (€STR) be used as the risk-free rate for the euro area and is now focused on supporting the market with transitioning.
Why is a smooth transition to the €STR important?
Careful transition planning by market participants is needed to minimise disruption to markets and consumers and to safeguard the continuity of contracts to the greatest extent possible, including contracts that currently reference a term rate rather than an overnight rate.
How should the market transition from EONIA to the €STR?
The working group recommended on 14 March 2019 that market participants gradually replace EONIA with the €STR as a reference rate for all products and contracts and make all necessary adjustments for using the €STR as their standard benchmark, including making the appropriate changes to their systems to enable a T+1 publication, i.e. taking into account that the €STR will be available by 09:00 CET based on individual transactions conducted on the previous trading day, while currently EONIA is published by 19:00 CET based on same-day transactions.
The working group also recommended that the European Money Market Institute (EMMI), EONIA’s administrator, modify the current EONIA methodology to become €STR plus a spread from the first publication date of €STR, i.e. 2 October 2019, until the end of 2021, to give market participants sufficient time to transition to the €STR.
These recommendations were made taking into account feedback received on the report on the transition from EONIA to the euro short-term rate.
EONIA to €STR legal action plan
As part of its mandate, the working group published a set of recommendations on the legal action plan for the transition from EONIA to €STR, including to address the legal implications for new and legacy contracts referencing EONIA.
The working group recommends the €STR plus a fixed spread of 8.5 basis points as the EONIA fallback rate for all products and purposes.
The working group recommends that market participants should:
- consider, whenever feasible and appropriate, no longer entering into new contracts referencing EONIA, in particular new contracts maturing after 31 December 2021, as EONIA will cease to exist after that date;
- consider, for existing contracts referencing EONIA and maturing after December 2021, replacing EONIA as a primary rate as soon as possible or embedding robust fallback clauses;
- include robust fallback provisions in those cases where new contracts still reference EONIA and mature after December 2021, or fall within the scope of the EU Benchmarks Regulation (BMR);
- ideally include, for the purpose of enhancing transparency, while not strictly necessary, a clarification in new contracts signed before October 2019 stating that the EONIA methodology is expected to change as of 2 October 2019 and that, once it has changed, references to EONIA in these contracts will be understood to be references to EONIA as changed, unless otherwise agreed by the parties.
€STR-based fallbacks for EURIBOR
The working group is also looking at identifying fallbacks for EURIBOR based on the €STR. Both backward and forward-looking options are being considered. As part of its work on forward-looking options, in March 2019 the working group recommended a methodology based on (tradeable) OIS quotes for calculating a €STR-based forward-looking term structure and is now inviting benchmark administrators to express their interest in producing such a term structure.
Call to benchmark administrators for expressions of interest
The working group invites interested benchmark administrators to present their proposal for a €STR-based forward-looking term structure that could be used as a fallback in EURIBOR-linked contracts at the working group meeting of 16 October 2019. Interested benchmark administrators should signal their intention to present a proposal by sending an email to EuroRFR@ecb.europa.eu by 30 September 2019.
Structure of the group
The working group is chaired by a private sector representative and the ECB provides the secretariat. The working group is made up of 21 credit institutions as voting members, five institutions as non-voting members and one institution as an invitee.
The group was set up by the ECB, together with the Financial Services and Markets Authority (FSMA), the European Securities and Markets Authority (ESMA) and the European Commission. These four public institutions have observer status in the group.
In addition, three subgroups on term structure, contract robustness and EONIA transition have been established by the working group.
The working group is currently reorganising its subgroups to better structure its work on helping the market adopt its recommendations. Read more on the reorganisation here.
Market participants are welcome to apply to the new subgroups in order to broaden the range of views and ensure the full financial industry is represented.
Applicants should fill in the dedicated application form provided below and send it by email to EuroRFR@ecb.europa.eu. Applicants are expected to provide a brief overview of their motivation for applying and state their willingness to dedicate time and resources to any work streams to which they are allocated.
Commitment to transparency
The working group regularly consults market participants and end users, as well as gathers feedback from other public authorities. Its terms of reference are publicly available and the group regularly reports on its meetings. This is to ensure transparency throughout the entire process of identifying and adopting new risk-free rates. Ensuring broad market acceptance is vital for the effective functioning of any alternative to existing benchmark rates.