The European Money Markets Institute (EMMI) has concluded that basing EURIBOR rates on transactions will not be possible. This follows a "pre-live verification program" that involved collecting transaction data from 31 banks over a six-month period from September 2016 to February 2017.
The EMMI gave two reasons for their conclusion:
Firstly, the decline in unsecured lending in the money markets since the financial crisis means that the volumes traded and the number of market participants are both too low to produce a reliable reference rate. This should not come as a surprise. The combination of increased regulation, greater concentration in the banking sector and zero or negative interest rates have all contributed to a reduction in money market activity and a shift from unsecured to secured lending (such as repo).
Secondly, the EMMI noted that the alternative methodology would not result in a rate that was "sufficiently similar" to the current rate in terms of both level and volatility.
The EMMI will now work on establishing a hybrid method for calculating EURIBOR, based on a combination of transactions and contributed rates. The initial results of that work should be available early in 2018.
In contrast, the UK is already moving toward an entirely transaction-based reference rate. At the end of April, the Bank of England (BoE) announced that SONIA, the overnight index swap (OIS) linked to the BoE's base rate, will be used as the benchmark risk-free rate. The decision was reached by the BoE's Working Group on Sterling Risk-Free Reference Rates, comprised of banks trading GBP interest rate swaps. This means that SONIA is all but guaranteed to replace sterling LIBOR as the floating rate in interest rate swaps, though that will be a slow process.
Across the Atlantic, in the US, the Fed is also moving toward a transaction-based reference rate (see Automated Trader Issue 40, page 9 and Issue 41, page 10).
In response to the EMMI's report, the ECB announced that it will "investigate the possible provision of an unsecured overnight benchmark based on data already available" [to the ECB or national central banks]. The obvious choice for the ECB is EONIA, the OIS rate that it already calculates as a weighted average of unsecured lending among 32 banks in the EU and European Free Trade Area (EFTA).