Interest rate benchmarks: what comes after EURIBOR®?

While it has no cessation date, the working group on euro risk-free rates is responsible for outlining alternatives that could replace the EURIBOR^®. Jacob Rank-Broadley explores these potential alternatives and how they could replace EURIBOR^®.

1. The working group on euro risk-free rates recommends the introduction of fallbacks into EURIBOR® referencing cash products based upon an €STR term structure
2. Wide-scale implementation of suitable fallback language into EURIBOR^® referencing cash products will provide a safety net for any potential permanent EURIBOR^® cessation.
3. Refinitiv has recently introduced a forward-looking term €STR prototype available in spot-week, 1-month, 3-month, 6-month and 12-month tenors denominated in euros.

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Following the LIBOR scandal and subsequent regulatory reform of interest rate benchmarks used to price derivatives, securities and loans worth hundreds of trillions of dollars, the financial services industry has been moving away from IBOR benchmarks and towards nearly risk-free reference rates (RFRs) for some time.

The most famous example of this is the transition from LIBOR towards RFRs such as SOFR, SONIA and TONA. However, there are plenty of less well-known examples, such as the transition of CDOR to CORRA in Canada and SOR to SORA in Singapore.

Change on the way for EURIBOR^®?

In the eurozone, the most widely used interest rate benchmark is EURIBOR^®, which measures ‘the rate at which wholesale funds in euro could be obtained by credit institutions in current and former European Union and European Free Trade Association countries in the unsecured money market’.

While EURIBOR^®, unlike its more famous sibling, has no confirmed cessation date, change is coming: the working group on euro risk-free rates is responsible for recommending RFRs that could serve as an alternative to interest rate benchmarks like EURIBOR^®.

For new instruments, liquidity is building in €STR, the overnight euro RFR, which now accounts for around one-fifth of derivatives trading activity, according to the ISDA-Clarus RFR Adoption Indicator.

For legacy instruments, the working group on euro risk-free rates is in the process of laying the groundwork for the possible permanent discontinuation of EURIBOR^®. This will help to enhance legal certainty and reduce the risks stemming from the worst-case scenario where EURIBOR^® experiences an abrupt and unplanned end.

Introduction of fallbacks into EURIBOR^®

In May 2021, the working group recommended the introduction of fallbacks into EURIBOR^® referencing cash products based upon an €STR term structure and a spread adjustment methodology. This is used to avoid potential value transfer if a fallback is triggered.

For some products, such as debt securities and current accounts, the working group was supportive of a backward-looking methodology based on historical daily overnight fixings.

For other products, such as retail mortgages, consumer and SME loans, trade finance products, some export and EM finance products and securitisations, it recommends a forward-looking €STR term rate.

Recommended fallback methodology per use case

Source: Recommendations by the working group on euro risk-free rates on EURIBOR® fallback trigger events and €STR-based EURIBOR® fallback rates

Safety net for any EURIBOR^® cessation process

Wide-scale implementation of suitable fallback language into EURIBOR^® referencing cash products will provide a safety net and could materially simplify the process associated with any potential permanent EURIBOR^® cessation.

For example, the cessation of the USD LIBOR has thrown up a whole host of challenges for legacy products that mature once the USD LIBOR has ended.

Much work has been done to retrospectively introduce suitable fallback language, be that through recommended best practices, new U.S. federal legislation and possibly even a synthetic USD LIBOR. The need for much of this work could have been avoided if suitable fallback language had already been widely adopted.

Refinitiv has recently introduced a forward-looking term €STR prototype available in spot-week, 1-month, 3-month, 6-month and 12-month tenors denominated in euros.

The prototype adopts a waterfall methodology to support publication during periods of illiquidity and data is collected during a long window

For further information about Refinitiv Term €STR, please visit www.refinitiv.com/termestr

The Refinitiv Term €STR Prototype (“Term €STR Prototype”) is subject to Refinitiv’s terms of use and disclaimer. €STR, administered by the European Central Bank (“ECB”) and available free of charge on the ECB website, is an input into the Term €STR Prototype. Use of €STR data and reference to the “€STR” mark, the intellectual property of the ECB, are subject to the ECB’s €STR disclaimer and general disclaimer and copyright statement. Refinitiv is not affiliated with the ECB and the use of €STR data and the “€STR” mark does not imply or express any approval, endorsement or recommendation by the ECB of any products or services offered by Refinitiv.

EURIBOR® is the registered trademark of and used under licence of EMMI a.i.s.b.l. The source of EURIBOR® data is the EMMI.