Working group on euro risk-free rates
Working group on euro risk-free rates
Origin of the Working group on euro risk-free rates
The working group on euro risk-free rates was initially established in 2018 by the ECB, together with the Belgian Financial Services and Markets Authority, the European Securities and Markets Authority and the European Commission in order to identify and recommend risk-free rates that could serve as 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).
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.
The ECB published the €STR for the first time on 2 October 2019 and as of 15 April 2021 the ECB also started publishing compounded €STR average rates with a 1 week, 1 month, 3 months, 6 months and 12 months tenor together with a compounded index based on €STR to derive compounded rates for any non-standard tenor.
Importance of the €STR transition
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.
The initial working group has analysed the impact of the transition from EONIA to the €STR from different perspectives. The outcome of this analysis is reflected in several documents which include recommendations on how to smoothen the transition to the €STR before EONIA is discontinued on 3 January 2022.
You will find the recommendations of the working group on euro risk-free rates on the transition path from EONIA to the €STR and on a €STR-based forward-looking term structure methodology here.
€STR-based fallbacks for EURIBOR
On 11 May 2021 the working group recommended EURIBOR fallback trigger events and rates in order to support market participants in developing contractual fallback provisions for a scenario in which EURIBOR may permanently cease to exist.
New key areas of focus of the new working group
The incumbent WG has in the meantime completed its agreed deliverables. In order to continue contributing to the reform efforts in the euro area and facilitate coordination between private sector and public sector efforts in that respect, the WG will continue to exist with updated structure and mandate. The new working group will focus amongst others on:
- the transition from EONIA to €STR for a diverse range of financial products by the end of 2021,
- informing, raising awareness and educating users about interest rates reform in the EU,
- the timely adoption of EURIBOR fallback provisions by EU supervised entities,
- identifying potential issues related to the impact of LIBOR discontinuation in the EU,
- coordinating on cross currency issues with similar working groups in other jurisdictions.
The new Terms of Reference are under finalisation and will be published when finalised.
New structure of the group
The new working group is again chaired by a private sector representative while the ESMA provides the secretariat. The working group currently includes 23 voting members and five associations as non-voting members. The four public institutions being the ECB, ESMA, FSMA will continue to have an observer status in the group.
Good communication is important to enable a smooth transition to the €STR. The initial working group on risk-free rates has prepared a toolkit containing materials to help interested parties with their own communication and education efforts. This communication toolkit currently consists of:
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.
You will find the Competition Law compliance Guidelines here.
For questions or comments please contact EuroRFR@esma.europa.eu