An alternative to Euribor, should a revamp of the benchmark to make it compliant with European regulation not be successful, can’t be done on time, according to recently published minutes from a working group formed by the European Central Bank.
Europe’s endorsed alternative reference rate, Ester (the euro short-term rate), doesn’t exist yet. But it will need to, and be fully functional, by January 2020. This is when the EU Benchmarks Regulation (BMR) stipulates that critical benchmarks like Eonia and Euribor must comply or be replaced in financial instruments.
The European Money Markets Institute (EMMI), which administers Eonia and Euribor, has already deemed the former to be non-compliant with BMR, and so the working group still intends to get the market transitioned to Ester by the deadline.
Eonia and the still-theoretical Ester are both overnight rates, so transition on time is still possible. But it’s easier said than done – Ester won’t be published until October 2019, meaning that many existing contracts will need to be amended and transition agreements made in a matter of months.
The change will also affect valuations of contracts linked to Eonia, and market participants will have to overhaul their operations to accommodate a new benchmark.