ECB-Backed Body Studies Euribor Exit for $214 Trillion in Assets

A European Central Bank-backed committee is exploring options for a transition should Euribor, one of the cornerstones of the European Union’s financial system, cease to exist.

While the ECB working group on euro risk-free rates said there are no current plans to retire the interest-rate benchmark, which is linked to a notional 180 trillion euros ($214 trillion) in financial products, it’s testing the water for how an exit might work.

Unlike the London interbank offered rate, Euribor is set to survive beyond the end of 2021. Yet there is speculation that it could eventually be phased out as part of a wider overhaul of benchmarks tainted by manipulation scandals. The ECB said in July that banks need to be prepared for all scenarios, including the end of Euribor.

At law firm Reed Smith, attorneys are advising clients on whether to stick with Euribor or move to the euro short-term rate, a relatively new benchmark known as ESTR, according to partner Claude Brown. Regulators favor ESTR because of the more robust trading that underpins the rate, making it a truer reflection of the cost of capital and less susceptible to corruption.

“Operationally this takes a long time, getting your internal systems to comply is probably more problematic,” Brown said of the switch. “The problem with ESTR is there are no established market protocols and the market is so thin.”

The working group on Monday issued a public consultation about “robust and resilient” fallback provisions in contracts that would help the market shift away from Euribor, using methodologies based on ESTR.

“While there are no plans to discontinue Euribor, the fallback measures would cover a scenario in which the benchmark were to cease permanently,” the working group said. In a second consultation it sought views about so-called trigger events that could help set off the transition process.

Regulators have focused on reforming rather than scrapping Euribor. The method of calculating the rate has changed to prioritize actual transaction data over estimates and panel judgments, yet there’s talk that could change.

What Bloomberg Intelligence Says:

“Euribor should outlive Libor but it’s longer-term future may still be in question as the world transitions to overnight risk-free rates. The issue with Euribor is the lack of actual transactions used to calculate fixings.”

-- Tanvir Sandhu, Chief Global Derivatives Strategist

“It would also be feasible that one of the major banks still left in the panel decides to leave -- This could then cause an exodus,” said Christoph Rieger, head of fixed rate strategy at Commerzbank AG. “The regulator could still compel banks to stay in the panel for up to five years, but the end could then come sooner.”

The ECB began phasing in ESTR in October 2019, and the benchmark will fully replace the euro overnight index average, also known as Eonia, in early 2022.

©2020 Bloomberg L.P.

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