14 November 2012

Eurosystem's response to the Commission's consultation on the regulation of indices

The Eurosystem's response focuses on the scope for Euribor reform, as Euribor represents a key interest rate benchmark in the euro area and is of particular importance for the transmission of the euro area's monetary policy.

The response is structured as follows: the overall stance of the Eurosystem with respect to the Commission’s public consultation is presented in the first part of the document. Part two provides an assessment of Euribor’s function as a public good, its systemic importance and its role in the transmission and implementation of monetary policy. Part three presents the Eurosystem’s view on the governance reforms that need to be undertaken in the short term, part four discusses reform options in the medium to long term, and part five addresses the impact of potential regulation.

Overall Stance

The Eurosystem believes that there is significant scope for Euribor reform and that there are a number of measures that can be taken to increase the market’s confidence in Euribor’s reliability, representativeness and resilience.

The Eurosystem believes that any approach to Euribor reform should distinguish between short-term measures aimed at immediate enhancement of confidence in the integrity of the benchmark, and more medium to long-term changes.

In the short term, the focus should be on improving the governance process, as well as on providing a clear road map for both the regulation and supervision of Euribor. Regarding governance, the ECB takes the view that in order to enhance the governance structure surrounding the Euribor rate-setting process there are a number of important measures that can be taken that are relatively easy to implement and that have the potential to increase the market’s confidence in Euribor. It is also important for the changes implemented in the short term to be fully consistent with potential later reforms, to avoid unnecessary disruptions.

Furthermore, the Eurosystem believes that while such governance reforms represent necessary measures, further initiatives aimed at enhancing the reliability, representativeness and resilience of Euribor need to be considered. An increased reliance on transaction-based figures in the calculation of Euribor should be beneficial in this respect, although such changes can only be specified at a later stage after thorough testing. Making submissions more transaction-based would also enhance the effectiveness of the recommended governance measures, as transaction data are easier to verify ex post. However, any changes could have legal and financial stability implications, which need to be assessed.

The Eurosystem considers that, given the systemic importance of Euribor and its role in monetary policy transmission, the European Supervisory Authorities (ESAs) could be involved in the supervision of the Euribor rate-setting process. The Eurosystem believes that authorities such as the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are better placed than the ECB to assume such a role, as the conflicts of interest would be more limited.

The Eurosystem believes that supervisory involvement could encompass the key governance aspects of the Euribor rate-setting process: the rate submission process at panel bank level, the calculation and dissemination of Euribor, the robustness of the governance of Euribor-EBF and the ex post checking process. The supervision process should be extended to other systemically important benchmarks in the EU.

Considering Euribor’s and Libor’s systemic importance, as well as their function as a public good and their role in monetary policy transmission, the Eurosystem believes that their regulation and that of other systemically important financial interest rate benchmarks should be considered, with a view to enhancing the governance of all the key processes surrounding the rate-setting process.

The Eurosystem acknowledges the results of the Wheatley Review of Libor and welcomes its proposals to strengthen the governance structures surrounding Libor, including through regulation and supervision, and to make Libor more transaction-based. The Eurosystem notes that the Libor reform proposals are broadly consistent with the considerations of the Eurosystem with regard to Euribor.

Furthermore, the Eurosystem considers that the process of reforming Euribor, Libor and, potentially, other interest rate benchmarks should be coordinated at the European and global level to ensure consistency and a level playing field.

Full response

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