European Money Markets Institute (EMMI)

EMMI Consults on New Reference Index for Euro Repo Market

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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

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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).