EUROPE´S BANKS WARNED ON ENDING INTEREST RATE BENCHMARK / THE FINANCIAL TIMES OP EDITORIAL

Europe’s banks warned on ending interest rate benchmark

Call to speed up preparations for start of new €STR benchmark in October

Martin Arnold in Frankfurt and Philip Stafford in London


© AP


European banks and other financial institutions need to speed up their preparations for the phasing out of a key interest rate benchmark which is used to price more than €24tn of derivatives, loans and bonds, a body advising the European Central Bank has warned.

Financial markets are heading for confusion and legal disputes unless more is done to shift away from the Eonia interest rate benchmark, the head of the ECB’s working group overseeing the transition told the FT.

Eonia will be replaced by the €STR benchmark in early October, after a series of market manipulation scandals eroded confidence in the way the existing benchmark is calculated.

Steven van Rijswijk, the steering group head and chief risk officer at Dutch bank ING, told the FT: “I am worried about complacency among market participants, especially as regards the change in the timing of the publication of Eonia, which takes place already on October 2 and creates very significant operational challenges.”

Eonia is used to price about €22bn of interest rate derivatives, €2tn of cash market transactions — such as current accounts and overdrafts — and about €4.4bn of debt securities.

In a report to be published on Monday the ECB’s working group will recommend that existing contracts should be switched over from Eonia to €STR as soon as possible.

“Millions of contracts need to be changed,” said Mr van Rijswijk. “That will cost quite a bit of money.” He added that institutions need to adapt their IT systems and review documentation, procedures and product structures.

The new system is designed to be more robust as it is based on the price of interbank transactions submitted daily by 50 banks, while Eonia has been set using estimates from a narrower group of lenders.

Mr van Rijswijk said he was worried that if market participants were not ready for the start of the transition away from Eonia it would lead to “uncertainty and confusion around the pricing and valuation of financial products and instruments”.

“This could give rise to financial and risk reporting issues and could also lead to disputes among market participants,” he said. “This can all be avoided if all market participants are adequately prepared.”

In the wake of the financial crisis banks were fined billions of dollars and some former employees were jailed for manipulating interest rate benchmarks including Libor, Euribor and Eonia. Most of these benchmarks are being replaced or radically overhauled.

Europe has already delayed the Eonia replacement process by a couple of years and lags other jurisdictions like the US and UK in making the transition.

As well as switching to the new €STR standard, Mr van Rijswijk said market participants would need to adjust to a timing change, with the new transition rate being published by the ECB at 9:15am UK time rather than the prior evening.

For more than two years both €STR and the transition Eonia rate will be published until the latter is removed completely from usage at the start of 2022. The transition rate will be priced at an 8.5 basis point discount to Eonia.

The transition could have an impact on the way financial institutions account for the value of derivatives and other products, Mr van Rijswijk said, adding that the working group had contacted the International Accounting Standards Board, which is expected to rule on the matter in the coming months.