Benoît Coeuré: The importance of euro interest rate benchmark
reforms
Welcome address by Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, at the first meeting of the Working Group on Euro Risk-Free Rates, at the ECB, Frankfurt
am Main, 26 February 2018.
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On behalf of colleagues from the European Commission, the European Securities and Markets
Authority, Belgium's Financial Services and Markets Authority and the European Central Bank
(ECB), welcome to this first meeting of the Working Group on Euro Risk-Free Rates. Thank you
for dedicating your time and resources to supporting the working group in successfully delivering
on its mandate.
I would particularly like to thank Koos Timmermans, Chief Financial Officer of ING Group and
Vice-Chairman of ING Bank, for agreeing to chair the working group. I am convinced that the
group will benefit from his extensive experience in European banking and financial markets.
The task at hand is of utmost importance. First and foremost, the working group has a mandate
to identify and develop an adoption plan for a risk-free overnight rate that can serve as a basis for
an alternative to the benchmarks currently used in the euro area. As a second step, the working
group should explore ways to ensure a smooth transition to the preferred new rate.
Both the financial and public sectors have a keen interest in a smooth and successful reform of
the reference interest rate.
For the financial sector, reference rates play a pivotal role because they are widely used in a
broad range of financial products and contracts. In the past, we have seen banks become
increasingly reluctant to participate voluntarily in benchmark panels, mainly due to potential
litigation and compliance risks as well as increasing contribution costs. Together with the
declining activity in the underlying market, this has undermined confidence in the reliability and
robustness of existing benchmarks.
For the public sector, a smooth and successful reform is needed to underpin the good
functioning of euro area money markets and trust in the related products. For the ECB in
particular it is vital as monetary policy is initially transmitted through financial markets.
A more reliable and robust reference interest rate may also enhance financial stability, for three
main reasons:
First, without robust fallback arrangements, a loss of confidence in reference rates may lead
to market functioning being disrupted.
Second, poorly designed reference rates, given their underlying role in many financial
contracts, may transfer risks and pricing errors across financial markets, or create greater
and unnecessary basis risk. Ultimately, this might also affect the financing conditions of
households and firms.
And third, unreliable reference rates - for example, reference rates that become highly
volatile due to idiosyncratic factors - may make it difficult for the central bank to assess
general money market conditions and prevent it from responding to potential sources of
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tension in interbank markets.
With this in mind, it is easy to see that planning for contingencies, including considering
alternative rates, is essential to safeguard the sound functioning of our financial markets.
This is also reflected in two general recommendations of the Financial Stability Board (FSB) that
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aim to guide the reform of the reference rate and the transition to alternative benchmarks.
The first recommendation is to strengthen existing benchmarks by underpinning them with
transaction data to the greatest extent possible. Attempts to reform existing benchmarks have
shown, however, that the number of transactions involved is often limited, making the search for
robust fallbacks even more difficult. The second recommendation is to develop alternative, nearly
risk-free rates. We anticipate the recommendations of the working group to comply with the
recommendations of the FSB and the guidance issued by the International Organization of
Securities Commissions (IOSCO).
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The EU Benchmarks Regulation sets a demanding timeframe for the reform.
It has set 1 January 2020 as a deadline for benchmarks designated as critical to comply with its
provisions. These provisions are also relevant for contracts based on the EONIA benchmark.
While users of such contracts are compelled to provide for a fallback solution, there is currently
no alternative benchmark rate that is suitable for both new and outstanding contracts.
In early February 2018 the EONIA administrator - the European Money Markets Institute (EMMI) -
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announced that it would no longer pursue a thorough review of the EONIA.
The future use of the EONIA will hence depend on the willingness of both the panel banks and
EMMI to support the continuity of the benchmark, as well as on the existence of viable
alternatives.
In the absence of a solution for legacy transactions - i.e. transactions based on the EONIA
initiated before 1 January 2018 and maturing after 1 January 2020 - market participants are
exposed to legal and operational risks. The issue of the legal transition must be addressed.
In parallel, the ECB has launched an initiative to produce an overnight interest rate based on data
already available to the Eurosystem under the Money Market Statistical Reporting Regulation.
Let me elaborate. The ECB rate is designed to provide a backstop to the existing overnight
benchmark, but the working group can also consider it as a candidate for a fallback rate. The
ECB aims to start releasing a daily rate before 2020.
A summary of responses to the ECB's first public consultation on developing a euro unsecured
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overnight interest rate was published on the ECB's website in mid-February 2018. A second
public consultation document building on the analysis presented in the first consultation
document, and the feedback received from market participants, is currently being prepared. It will
explore the methodology to be used for the new rate as well as key operational and technical
parameters. The document is scheduled to be published towards the end of March 2018.
Let me conclude by saying that, for the reform to be successful and conducted in a
nondisruptive manner, it is essential that this working group reaches a broad-based consensus on
alternative risk-free rates and on the best approaches for incorporating their use in financial
contracts. This consensus should extend beyond this working group and include the wider
financial sector community. One way to achieve this is by involving institutions, or financial
subsectors, that are not represented in the working group discussions.
Coordination, cooperation and transparency across market segments, products and users is
therefore essential for the success of the benchmark reform and the possible transition to
alternative rates. Many users and other involved parties may not yet be aware of the changes to
come, and all of us need to make an effort to reach out to them too.
Thank you.
BIS Economic Consultative Committee (ECC) report entitled "Towards better reference rate practices: a central
bank perspective" (March 2013).
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FSB report "Reforming Major Interest Rate Benchmarks" (July 2014).
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Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as
benchmarks in financial instruments and financial contracts or to measure the performance of investment funds
and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014.
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EMMI announcement "State of play of the EONIA Review" (February 2018)
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Summary of responses to the ECB's first public consultation on developing a euro unsecured overnight interest
rate (February 2018)