Bank Push for Benchmark-Rate Delay Makes Headway in Brussels

(Bloomberg) -- Banks are finding allies in Brussels with their call for extra time to adopt a new euro benchmark lending rate as Europe tries to put a spate of rigging scandals behind it.

Some European Union lawmakers are searching for a way to give banks more time to replace the existing benchmark -- the euro overnight index average, or Eonia -- with a new rate produced by the European Central Bank. A smooth transition is critical, because about 22 trillion euros ($25.3 trillion) of derivative contracts are tied to Eonia.

Time is short. The use of Eonia will be restricted at the start of 2020 because it doesn’t meet EU standards, and the ECB may not start publishing its replacement -- the euro short-term rate, or Ester -- until October 2019. That short window makes an extension of Eonia’s life span essential, according to Caroline Nagtegaal, a Dutch lawmaker in the European Parliament who has proposed a legislative fix to give banks more time to make the switch.

“A longer transitional period of two years for critical benchmarks is appropriate” to allow for a smooth transition and “minimal market disruptions,” Nagtegaal said in a parliamentary hearing on Thursday.

Risk-Free Rates

Lenders in an industry working group on euro risk-free rates whose members include BNP Paribas SA and Deutsche Bank AG chose Ester as their preferred replacement for Eonia. The move is part of a global shift to new rates after banks paid billions of dollars in fines for rigging the London interbank offered rate and other widely used benchmarks.

The working group wants at least two more years to make the transition to Ester. The challenge for lawmakers is that there’s not much time left to push bills through before the European Parliament breaks in April for elections the following month. The European Commission, which initiates all EU legislation, has said there’s currently no proposal on the table to open up the bloc’s benchmarks law and extend the use of Eonia.

That means the delay will have to be attached to a bill already in the pipeline. Both the parliament and member states are pursuing two main options. Nagtegaal has attached a rider on a two-year extension to an overhaul of the EU’s regulatory agencies. On Thursday, she said she’d attach the same amendment to a reform of EU low-carbon benchmarks.

A proposal has been made to EU member states, which also must approve legislation, for three extra years, according to people familiar with the matter.

©2018 Bloomberg L.P.