ECB-backed body studies Euribor exit for 180t euros in assets

Frankfurt

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 (S$287.6 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.

"When it becomes clear that the whole world is moving to risk-free-rate overnight based curves, at some point market participants could question why Euribor is surviving on an island of its own," said Christoph Rieger, head of fixed rate strategy at Commerzbank AG.

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 the euro short-term rate, a relatively new benchmark commonly known as ESTR.

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"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 prioritise actual transaction data over estimates and panel judgments, yet there's talk that could change.

"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 Commerzbank's Mr Rieger. "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.

Regulators prefer ESTR because of the more robust trading that underpins the benchmark, making it a truer reflection of the cost of capital and less susceptible to corruption. BLOOMBERG