27 September 2016

ECB's Cœuré: Reforming financial sector benchmarks

Welcome remarks by Benoît Cœuré, Member of the Executive Board of the ECB, at the annual meeting of the Money Market Contact Group, Frankfurt am Main

[...] The EURIBOR reform has now reached an important stage. The transition to the transaction-based methodology is foreseen for 2017 and the administrator is planning a pre-live verification exercise to ascertain the feasibility of the proposed methodology under current market conditions. For the pre-live verification – and eventually for the EURIBOR reform – to be a success, broad market representation has to be achieved. Therefore, not only should current panel members participate but also other banks in the euro money market.

A lack of participants might seriously threaten the completion of the pre-live verification and ultimately the reference rate itself. Therefore, in view of the tremendous importance of benchmarks such as EURIBOR, the ECB would like to see banks take responsibility for the benchmark in two ways. Firstly, by participating in the pre-live verification and secondly, by eventually joining the panel of contributors to EURIBOR with the launch of the new calculation methodology.

Banks are among the biggest users of EURIBOR. As such, they would also incur the biggest costs and losses if it came to an abrupt end. It is therefore up to the banking industry as a whole to support this benchmark. But the burden cannot only be shouldered by the current panel banks, which have indeed shown their sense of responsibility. Despite the related costs and perceived risks, they have remained in the panel and helped to prevent any disorderly dismantling of EURIBOR.

But there are other examples. In some cases, banks that are among the largest institutions in their jurisdiction, and therefore rely hugely on the benchmark to price their products, have chosen to leave the panel. This is a worrisome development.

Some members left because of the perceived elevated risks related to the usage of expert judgement while contributing to EURIBOR. Since their departure, however, there have been a couple of important changes. Firstly, a new regulation has been adopted in Europe, establishing rules guiding the process of setting a benchmark and therefore contributing to greater regulatory certainty. Secondly, the envisaged reform of EURIBOR, aimed at anchoring the benchmark in transactions, will eventually remove the expert judgement and therefore the subjective element in contributing to EURIBOR.

Some banks also saw as an impediment for their participation in the envisaged transaction- based index the costs they will incur for transaction reporting. But the incremental costs for joining the EURIBOR pre-live verification and for contributing to a benchmark with transaction data may actually be limited for those banks, which already report under the ECB Money Market Statistical Reporting Regulation. This is because these banks have already set up systems in order to extract and report transaction data. [...]

Full speech

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