Working group on euro risk-free rates

The working group on euro risk-free rates was established to identify and recommend risk-free rates that could serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area, such as the euro overnight index average (EONIA) and the euro interbank offered rate (EURIBOR). This is a private sector working group; the ECB provides the secretariat and attends as an observer only.

The group recommended on 13 September 2018 that the euro short-term rate (€STR) be used as the risk-free rate for the euro area and is now focused on supporting the market with transitioning.

Second roundtable on euro risk-free rates

This event was hosted by the European Central Bank and took place on
25 September 2019 in Frankfurt am Main. Please click here to view the programme including on-demand videos.

Why is a smooth transition to the €STR important?

Careful transition planning by market participants is needed to minimise disruption to markets and consumers and to safeguard the continuity of contracts to the greatest extent possible, including contracts that currently reference a term rate rather than an overnight rate.

How should the market transition from EONIA to the €STR?

The working group published a report including a set of recommendations on the impact of the transition from EONIA to the €STR on cash and derivatives products. The report provides market participants with further details on how to transition from EONIA to the €STR and on how to make the appropriate changes to adapt to a T+1 publication, i.e. taking into account that the €STR will be available at 08:00 CET based on individual transactions conducted on the previous trading day. EONIA will continue to be published by 19:00 CET based on same-day transactions until 30 September 2019, after which time its publication time will move to 09:15 CET on T+1.

The report was prepared following the working group’s recommendation on 14 March 2019 that market participants should gradually replace EONIA with the €STR as a reference rate for all products and contracts and make all necessary adjustments for using the €STR as their standard benchmark, and the announcement made by the European Money Markets Institute (EMMI), EONIA’s administrator, that it would modify the current EONIA methodology to become the €STR plus a fixed spread of 8.5 basis points from the first publication date of the €STR (2 October 2019) until the discontinuation of EONIA on 3 January 2022, to give market participants sufficient time to transition to the €STR.

EONIA to €STR legal action plan

As part of its mandate, the working group published a set of recommendations on the legal action plan for the transition from EONIA to the €STR, including recommendations on how to address the legal implications for new and legacy contracts referencing EONIA.

The working group recommends the €STR plus a fixed spread of 8.5 basis points as the EONIA fallback rate for all products and purposes.

The working group recommends that market participants should:

  • consider, whenever feasible and appropriate, no longer entering into new contracts referencing EONIA, in particular new contracts maturing after 31 December 2021, as EONIA will cease to exist after that date;
  • consider, for existing contracts referencing EONIA and maturing after December 2021, replacing EONIA as a primary rate as soon as possible or embedding robust fallback clauses;
  • include robust fallback provisions in those cases where new contracts still reference EONIA and mature after December 2021, or fall within the scope of the EU Benchmarks Regulation (BMR);
  • ideally include, for the purpose of enhancing transparency, while not strictly necessary, a clarification in new contracts signed before October 2019 stating that the EONIA methodology is expected to change as of 2 October 2019 and that, once it has changed, references to EONIA in these contracts will be understood to be references to EONIA as changed, unless otherwise agreed by the parties.

€STR-based fallbacks for EURIBOR

The working group is also looking at identifying fallbacks for EURIBOR based on the €STR. Both backward and forward-looking options are being considered. As part of its work on forward-looking options, in March 2019 the working group recommended a methodology based on (tradable) overnight index swap (OIS) quotes for calculating a €STR-based forward-looking term structure and is now inviting benchmark administrators to express their interest in producing such a term structure.

Call to benchmark administrators for expressions of interest

The working group invites interested benchmark administrators to present their proposal for a €STR-based forward-looking term structure that could be used as a fallback in EURIBOR-linked contracts at the working group meeting of 16 October 2019. Interested benchmark administrators should signal their intention to present a proposal by sending an email to [email protected] by 30 September 2019.

Call to benchmark administrators for expressions of interest in producing a €STR-based forward-looking term structure

Structure of the group

The working group is chaired by a private sector representative and the ECB provides the secretariat. The working group is made up of 21 credit institutions as voting members, five institutions as non-voting members and one institution as an invitee.

The group was set up by the ECB, together with the Financial Services and Markets Authority (FSMA), the European Securities and Markets Authority (ESMA) and the European Commission. These four public institutions have observer status in the group.

In addition, three subgroups on term structure, contract robustness and EONIA transition have been established by the working group.

Participation in the substructures of the working group

The working group is currently reorganising its subgroups to better structure its work on helping the market adopt its recommendations. Read more on the reorganisation here.

Market participants are welcome to apply to the new subgroups in order to broaden the range of views and ensure the full financial industry is represented.

Applicants should fill in the dedicated application form provided below and send it by email to [email protected]. Applicants are expected to provide a brief overview of their motivation for applying and state their willingness to dedicate time and resources to any work streams to which they are allocated.

Application form

Commitment to transparency

The working group regularly consults market participants and end users, and gathers feedback from other public authorities. Its terms of reference are publicly available and the group regularly reports on its meetings. This is to ensure transparency throughout the entire process of identifying and adopting new risk-free rates. Ensuring broad market acceptance is vital for the effective functioning of any alternative to existing benchmark rates.

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