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 the €STR plus a spread until the end of 2021 to give market participants sufficient time to transition to the €STR.

As an €STR-dependent rate, EONIA would draw on a more representative and stable set of input data than currently provided by a panel of banks and would continue to represent the euro overnight unsecured market. A spread would be added to smooth out any perceived valuation transfer and balance sheet impact. The working group also believes that the evolved EONIA should be authorised under the EU Benchmarks Regulation until the end of 2021.

These recommendations were made taking into account feedback received on the report on the transition from EONIA to the euro short-term rate.

Which €STR-based term structure methodology should be used as a fallback in EURIBOR-linked contracts?

The working group recommended on 14 March 2019 the OIS tradable quotes-based methodology as the forward-looking methodology to be considered when calculating a term structure on the €STR derivatives markets as a fallback for EURIBOR-linked contracts, relying on several market assumptions and subject to further analysis. In particular, the working group will further analyse both the backward- and forward-looking approaches as potential fallbacks to EURIBOR-linked contracts.

This recommendation was made taking into account feedback received during a public consultation.

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.

Participation in the substructures of the working group

The members of the working group and its substructures were selected via a call for expressions of interest. Other non-banking institutions or associations are still welcome to flag their interest in contributing to the activities of the substructures reporting to the working group (see the working group’s terms of reference).

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.

Application form

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.

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