ECB warns of systemic risk if benchmark reforms fail

The European Central Bank is concerned about the risk of systemic problems if efforts to reform Euribor, one of the bank-to-bank lending benchmarks caught up in a global raterigging scandal, get torpedoed.

Authorities around the world are overhauling money market rates to prevent manipulation happening again.

But their widespread use in financial contracts from mortgages to derivatives is making the switch to alternatives a slow process.

Time is now getting tight, especially in Europe, where the European Commission wants either completely new, or revamped rig-proof versions of Euribor and ‘overnight’ EONIA rates in place by the start of 2020.

“We are dealing with a problem where we have a regulation that will kick in in 2020, which is less than 18 months away,” said ECB deputy director general of market operations, Cornelia Holthausen.

“So I really think we have to hope for the best for Euribor reform, so that we don’t have a systemic problem in January 2020.”

The eurozone faces an added challenge compared with the United States or Britain as it is also facing a 2020 deadline for overhauling the single currency area’s overnight rate EONIA, which regulators say must be scrapped.

The aim of the twin-track reform is to prevent the €131tn ($153.2tn) of derivatives and €5.3tn of loans that it is esti- mated will still reference them in 2020 from being thrown into chaos.

The ECB has been forced to come up with its own alternative to EONIA called ESTER, one of three options that a marketbased committee will choose.

ESTER would not be ready for use until late 2019, just months before EONIA is killed off, though the market is still hoping for a temporary stay of execution. “I do feel that many banks are pretty complacent and they think the public sector will solve the issue for them,” the ECB’s Holthausen said.

Finding a replacement for Euribor, which covers the longer 1-week to one-year part of the interbank lending market, looks even more problematic given the fewer number of transactions.

Euribor’s administrator, the Brussels-based European Money Markets Institute (EMMI), is testing the use of actual trades rather than the current banker-estimate based system that made such benchmarks vulnerable to being rigged.

There is a hybrid option too where mathematical calculations are used to bolster the sample, but the risk is that the Belgian national regulator which oversees EMMI, judges that it is still to easy to tamper with to win approval for use going forward.

And even if it does get authorised, banks may be too worried about potential future litigation to keep submitting data for compiling Euribor. Although Britain is undergoing a simpler switch by replacing sterling-denominated Libor with the Bank of England’s overnight rate SONIA, change is still too slow for British regulators.

The European Central Bank headquarters in Frankfurt. The ECB is concerned about the risk of systemic problems if efforts to reform Euribor, one of the bank-to-bank lending benchmarks caught up in a global rate-rigging scandal, get torpedoed.