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).