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 an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area, such as the euro overnight index average (EONIA) and the euro interbank offered rate (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 the transition to the €STR.
The ECB published the €STR for the first time on 2 October 2019, reflecting trading activity on 1 October 2019.
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 has analysed the impact of the transition from EONIA to the €STR from different perspectives. The outcome of this analysis is reflected in several documents which include recommendations on how to smoothen the transition to the €STR before EONIA is discontinued on 3 January 2022.
On 13 March 2020 the working group launched a public consultation seeking feedback on whether to recommend voluntary compensation and possible approaches for swaption contracts impacted by the CCP discounting transition to the €STR.
Press release, 13 March 2020
Based on the anonymised summary of the feedback the working group will evaluate whether recommendations can be derived from the results.
Further information on the recommendations made thus far is available in the section on how the market should transition from EONIA to the €STR.
€STR-based fallbacks for EURIBOR
The working group is also looking at identifying €STR-based fallbacks for EURIBOR for a scenario in which EURIBOR may permanently cease to exist. Both backward and forward-looking rates are being considered as options.
Two public consultations are expected in the course of 2020. The first will cover the preferred EURIBOR fallback rate for each financial product and the preferred spread adjustment to avoid potential value transfers upon activation of the fallback. The second public consultation will cover a set of trigger events for the application of the respective fallback rates.
Further information is available on the work completed thus far on €STR-based fallbacks for EURIBOR.
Good communication is important to enable a smooth transition to the €STR. The working group on risk-free rates has prepared a toolkit containing materials to help interested parties with their own communication and education efforts. This communication toolkit currently consists of:
Structure of the group
The working group is chaired by a private sector representative and the ECB provides the secretariat. The working group includes 21 credit institutions as voting members, five institutions as non-voting members and two institutions as invitees.
The group was set up by the ECB, together with the Financial Services and Markets Authority, the European Securities and Markets Authority and the European Commission. These four public institutions have observer status in the group.
In addition, four subgroups have been established by the working group, to address the issues of contract robustness, cash and derivative products, risk management and financial accounting and communication issues.
Market participants are welcome to apply to the subgroups of the working group on euro risk-free rates 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, and 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.