On July 4th the FSMA approved the reformed Euribor benchmark and added it to the BMR-compliant benchmark register. EMMI has since started the preparations to implement the benchmark. This is a further milestone in the transition away from LIBOR and non BMR compliant reference rates. What will the impact be?
EURIBOR vs EONIE & €ster
The volume of EURIBOR referencing instruments is roughly 5 times that of EONIA. Where EONIA is mostly used with short- term financial instruments, EURIBOR is used for longer term instruments. The volume of contracts requiring attention will therefore be greater. The change introduced to EURIBOR shares many similar characteristics with the transition from EONIA to €STER. E.g. A 1 to 5 basis point gap with the current EURIBOR, lower volatility and a stronger regional component. The type of impact arising from this can be found in our previous 3MM; One month to €ster, one month to EONIA.
Distribution over product types
Around 2,9 trillion in loans and 0,4 trillion in securities are expected to have a live running into next year. However, the long running products are not distributed evenly over product types. For mortgages and securities, a significant portion of current contracts need to be ready for transition as these will mature after 2021, as shown in the below charts.
EURIBOR transition, positive or negative?
Initially we saw the continuance of EURIBOR under a different form as a great plus, as the continuation had the potential to greatly reduce the administrative burden surrounding the transition. Now we are not in favour of that anymore. The new rate is a different rate both in value and dynamics. Keeping the name now only opens the door to confusion and will make transition arrangements more complicated. Not updating the existing arrangements will create winners and losers, and winners can gain simply by stalling the transition.
To advise, or not to advise
Although ISDA’s work is of great help in standardising the landscape, they also made it clear they will not enter into setting fair transition values for contracts. The EU working groups have also decided, in contrast with their US peers, not to advise on appropriate transition offsets. This is in part due to the correct understanding there is no 1 size fits all in this matter. Still it leaves the market participants to find a common ground by themselves. This will not be easy as relevant history statistics for the new benchmark is not available. The only published data are from the Bazooka era.
The intention of the new benchmark is to reduce dependency on human input but the new benchmark still relies heavily on human interpretation as depicted by below chart (dark blue).
Projective can help organise the systems transition and manage the client outreach. Are you in need of a good cup of coffee or just a chat? So are we connect!