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ECB, ESMA and European Commission to create new risk-free overnight reference rate

First Published 24th September 2017

Move follows the failure of the EMMI to replace EURIBOR

The European Central Bank (ECB), European Securities and Markets Authority (ESMA) and European Commission (EC) announced on Thursday that they have formed a working group "tasked with the identification and adoption of a risk-free overnight rate which can serve as a basis for an alternative to current benchmarks" (i.e. EONIA and EURIBOR). In addition, the ECB said it will expand publication of money market data, adding "aggregated rate and volume data for various money market segments and tenors", in order to "enhance transparency and improve money market functioning".

For background information click here: EURIBOR reform delayed.

Information in the ECB's press release implies that the new rate won't be based on repo, unlike the US replacement for IBOR, the 'broad Treasury refinancing rate'. (For more information, see "US chooses Treasury repo rate to replace LIBOR" and "Sterling LIBOR to be replaced by 2021"). Instead the rate will be an "unsecured overnight interest rate based on data already available to the Eurosystem". According to the bank, the "high-level features of this new overnight interest rate will be communicated to market participants in the course of 2018" with regular publication of the rate to begin in 2020. Until then, "existing rates [EONIA and EURIBOR] must continue to be provided in a robust and reliable manner".

The ECB has emphasised that it will not create a term reference rate - such as EURIBOR - because market participants could interpret central bank publication of a term rather than an overnight rate as providing a signal about the direction of monetary policy.

While none of the parties in the working group have explained why EONIA is not acceptable as the benchmark rate, there are some clues. Firstly, the volume of transactions has declined as a result of zero or negative policy interest rates and quantitative easing. Secondly, according to Morgan Stanley, lending is "skewed towards German transactions, in particular the German Landesbanks' lending to their local saving banks (German Sparkassen) at a higher rate as they do not have access to the wider interbank markets". While EURONIA has a wider panel that includes transactions brokered in London, volumes are also low, and politics means the EU will want to prevent the London market from setting the Eurozone benchmark rate.