euribor

EMMI Consults on New Reference Index for Euro Repo Market

 

The European Money Markets Institute (“EMMI“) published a consultation paper on June 15, 2017, concerning a new reference index for the euro repo money market.

EMMI has been working to find suitable risk-free (or nearly risk-free) rates based on robust and liquid underlying markets to complement the Euro Interbank Offered Rate (EURIBOR) and the Euro Overnight Index Average (EONIA), in line with regulatory recommendations put forward by the Financial Stability Board (FSB), among others. It aims to provide the market with a credible and robust index that is aligned with regulatory requirements and fills the gap left by the discontinuation, in January 2015, of Eurepo.

As money market patterns moved towards a greater reliance on secured funding, EMMI established a task force to explore the feasibility of a transaction-based benchmark for the secured segment of the euro money markets.

Transaction data from the three most active automatic trading systems in Europe covering the period 2006 to 2015 were analyzed to assess whether it is sufficient to support the determination of a new pan-European index, and the design considerations to be taken into account.

EMMI’s analysis identified that activity for the electronically traded repo market in euro is concentrated on the short term of the curve, which allows for the development of a purely transaction-based benchmark for the one-day tenor.

The consultation paper sets out, and seeks views on, its proposal for a pan-European transaction-based repo benchmark. It addresses the new repo index’s calculation methodology and its definition. Matters such as governance, publication, or potential or future licensing of the new repo index are not part of the consultation. The consultation closes to responses on July 14, 2017. EMMI expects to obtain a reliable indication of the market’s interest in, and need for, the proposed new repo index. In developing its proposal, EMMI focused on four design principles:

  • The new repo index should measure pan-European secured funding rates based on security-financed euro repo transactions.
  • The new index must be an accurate representation of the underlying interest it seeks to measure.
  • The source data for the new index should be sufficient to reliably measure this underlying interest.
  • The benchmark design should capture the majority of all eligible euro repo transactions.

The consultation paper summarizes EMMI’s work toward the development of a new repo index that satisfies these four principles, which are in line with regulatory best practices, such as the IOSCO principles for financial benchmarks and the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Regulation (EU) 2016/1011).

EMMI Report on Outcome of EURIBOR Pre-Live Verification Program

 

On May 5, 2017, the European Money Markets Institute (“EMMI“) published a report on the outcome of the Euro Interbank Offered Rate (“EURIBOR“) pre-live verification (“PLV“) program.

The PLV program has given EMMI an in-depth view of the market underpinning EURIBOR. It confirmed that market activity has changed as a result of current regulatory requirements, other sources of liquidity available to market participants, and other external factors. In this context, EMMI concluded that:

  • The rate and volatility levels under both methodologies (that is, current quote-based vs. fully transaction-based) are insufficiently similar for a seamless transition to be feasible under current market conditions.
  • The decreased level of daily market activity under current market conditions does not allow for a methodology that is fully based on transactions, as this would not yield a sufficiently sound and robust benchmark.

In its FAQs published alongside the report, EMMI stressed that there will be no immediate changes to the EURIBOR methodology and that the current quote-based EURIBOR will continue for the period necessary to develop an alternative methodology. EMMI stated that it remains committed to align the EURIBOR benchmark with the EU Benchmarks Regulation ((EU) 2016/1011). Accordingly, it will work on a hybrid methodology (that is, a model that is supported by transactions whenever available and relies on other pricing sources when necessary).

EMMI Considers EURIBOR Reforms

 

On March 9, 2017, the European Money Markets Institute (“EMMI“) issued a paper that considered the legal grounds for a proposed reform to EURIBOR.

Possible reform to EURIBOR was previously outlined by the EMMI in October 2015 (available here), and the most recently issued paper delves deeper into possible evolution. In particular, the paper considers the legal ramifications of the points previously considered.

The EMMI has encouraged EURIBOR users to consider the proposed reforms in an attempt to address possible issues around any changes. The paper is available here.

European Commission Implementing Regulation Establishing a List of Critical Benchmarks Used in Financial Markets under Benchmarks Regulation in OJ

 

On August 12, 2016, the European Commission Implementing Regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets pursuant to the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (2016/1011/EU) (Benchmarks Regulation), was published in the Official Journal of the EU (OJ).

The Regulation highlights that benchmarks play an important role in the determination of the price of many financial instruments and financial contracts and of the measurement of performance for many investment funds. In order to fulfill their economic role, benchmarks need to be representative of the underlying market or economic reality they reflect. Should a benchmark no longer be representative of an underlying market, such as interbank offered rates, there is a risk of negative effects on, inter alia, market integrity, the financing of households (loans and mortgages) and businesses in the Union.

The Implementing Regulation, which specifies the Euro Interbank Offered Rate (EURIBOR) as a critical benchmark, enters into force on the day following its publication in the OJ (that is, August 13, 2016). It will apply from January 1, 2018.

Benchmarks: Agreement Reached on ECON Committee

On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted its report on benchmarks. Key issues include: The Economic and Monetary Affairs Committee backed a draft EU law to make the benchmarks more trustworthy. The text aims to clean up the benchmark-setting process by curbing conflicts of interest like those that led to the London Interbank Offered Rate (LIBOR) rigging scandals of recent years. The setting of critical benchmarks that affect more than one country would be overseen by a “college” of supervisors, including the European Securities and Markets Authority (ESMA) and other competent authorities.

Curbing critical conflicts of interest

The draft law aims to curb conflicts of interest in setting “critical” benchmarks, such as LIBOR and EURIBOR, which, by influencing financial instruments and contracts with an average value of at least €500 billion, could affect the stability of financial markets across Europe.

The final decision on whether a benchmark is “critical” would be up to ESMA and national authorities, but a national authority could also deem a benchmark administered within its territory to be critical if it has a “significant” impact on the national market.

Critical benchmark administrators would have to have a clear organizational structure to prevent conflicts of interest, and be subject to effective control procedures.

Critical benchmark-setting data would have to be verifiable and come from reliable contributors who are bound by a code of conduct for each benchmark. Contributors, such as banks contributing data needed to determine a critical benchmark, would have to notify the benchmark administrator and the relevant authority if they wished to cease doing so, but would nonetheless have to continue doing so until a replacement were found.

Transparency requirements

All benchmark administrators would have to be registered with the ESMA and would have to publish a “benchmark statement” defining precisely what their benchmark measures and to what extent it is reliable. They would also have to publish or disclose existing and potential conflicts of interest and meet accountability, record keeping, audit and review requirements.

The text will be put to a vote by Parliament as a whole to consolidate Parliament’s position before its three-way negotiations with EU member states and the European Commission.

Reviews into LIBOR, EURIBOR and TIBOR

On July 22, the International Organisation of Securities Commissions (IOSCO) published a Web page on its review of the implementation of IOSCO’s principles for financial benchmarks by administrators of the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR) and the Tokyo Interbank Offered Rate (TIBOR).  IOSCO found that the three administrators have made significant progress in implementing most of the principles.  However, further work is needed on implementing the principles on benchmark design, data sufficiency and transparency of benchmark determinations.

Also on July 22, the Financial Stability Board (FSB) published a report prepared by the Official Sector Steering Group (OSSG) of regulators and central banks on reforming major interest rate benchmarks. The report was based on the March 2014 report of the Market Participants Group, a group of private sector experts asked by the OSSG to identify additional benchmark rates and to analyze transition issues arising from a move to an alternative rate.  It was also based on the IOSCO review.

In the report, the OSSG recommends a multiple-rate approach that involves: (i) strengthening the existing IBORs (the collective term used by the FSB for each of LIBOR, EURIBO and TIBOR) and other potential reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transactions data; and (ii) developing alternative, nearly interest-risk free reference rates.  Web PageFSB ReportMarket Participants Group Report.

UBS Fined £160 Million for Significant Failings in Relation to LIBOR and EURIBOR

On December 19, 2012, the FSA announced that it had fined UBS £160 million for misconduct relating to LIBOR and EURIBOR. The FSA’s final notice found that the misconduct was extensive and widespread, occurred in various locations around the world including Japan, Switzerland, the UK and the USA and, between 1 January 2005 and 31 December 2010, included:

  • The adjustment of UBS LIBOR and EURIBOR submissions to benefit UBS traders’ trading positions;
  • Colluding with interdealer brokers  to manipulate the Japanese Yen LIBOR submissions of panel banks to the benefit of UBS traders; and

Adopting LIBOR submissions directives whose primary purpose was to protect UBS’s reputation.  

European Commission Consults on the Regulation of Benchmarks and Market Indices

On 5 September 2012, the European Commission published a consultation document seeking views on issues relating to a possible framework for the regulation of the use and production of indices serving as benchmarks in financial and other contracts.  The consultation follows the recent revelations regarding the alleged manipulation of the LIBOR and EURIBOR benchmarks.

The Commission has requested views on the following points:

  • Information on indices and benchmarks – their definition, their purposes, the methodology behind their production and the persons who produce them.
  • Governance and transparency issues concerning the calculation of benchmarks, including data usage and persons contributing such data.
  • The use and purposes of benchmarks.
  • The ways in which private and public bodies provide benchmarks.
  • The potential impact of regulating benchmarks, including the international issues that will need to be considered.

The Commission has requested comments on the consultation by 15 November 2012.

FSA Fines Barclays £59.5 Million for Manipulation of LIBOR

On 27 June 2012, the FSA published the final notice issued to Barclays Bank plc, detailing a £59.5 million fine for misconduct relating to its submission of rates that formed part of the London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”). This is the largest ever fine that the FSA has imposed. Final Notice.

In particular, Barclays breached the following Principles:

  • Principle 5 (market conduct) – Barclays was found to have breach Principle 5 by making US dollar LIBOR and EURIBOR submissions that took into account requests made by interest rate derivatives traders.
  • Principle 3 (management and control) – Barclays did not have adequate risk management systems or effective controls in place relating to its LIBOR and EURIBOR submission process.
  • Principle 2 (skill, care and diligence) – Barclays failed to conduct its business with due skill, care and diligence when considering issues raised internally relating to its LIBOR submissions.

In addition to the fine by the FSA, the U.S. Commodity Futures Trading Commission fined Barclays $200 million, and Barclays agreed to pay a penalty of $160 million as part of an agreement with the U.S. Department of Justice.

The Barclays settlement is the first settlement announced in connection with the LIBOR probe, with regulators investigating more than 20 banks.