Euribor Managers Mulling Parallel Data-Based Benchmark With ECB

The group that manages the Euro Interbank Offered Rate, or Euribor, is considering setting up a parallel benchmark based on real transactions rather than estimates.

Euribor-EBF is exploring the move as part of its response to revelations that some lenders tried to rig interbank lending rates, tarnishing credibility of the indexes. The European Central Bank is providing technical assistance for a feasibility study, according to Euribor-EBF’s response to a review by global regulators.

Any new benchmark would be set up in addition to Euribor, according to the letter, sent to the International Organization of Securities Commissions. It wouldn’t affect any contracts linked to Euribor rates, the group said.

The move echoes comments made last month by Martin Wheatley, the head of the U.K. markets regulator. He said the London interbank offered rate should eventually be replaced with a transaction-based benchmark using a dual-track system. The tarnished benchmark, based on a daily survey of panel banks, should run in parallel with a new rate until a full overhaul of the system can be enacted, the Financial Conduct Authority chief executive officer said.

Global regulators are working on alternatives to Libor and Euribor after U.S. and U.K. officials uncovered attempts by banks to manipulate the benchmarks. Royal Bank of Scotland Group Plc, UBS AG and Barclays Plc have been fined a total of about $2.5 billion in the case, and at least a dozen firms remain under investigation.

Greater Oversight

Iosco recommended in April that the rates should be based on data from actual trades and that regulators should have greater oversight of the people who set the rates.

“We’re taking all necessary steps to comply with international recommendations,” Cedric Quemener, structure director at Euribor-EBF, said in a telephone interview today.

“Euribor-EBF is committed to put the EBA-ESMA recommendations in place in a timely fashion, and we are also reviewing what actions we would need to take to comply with the draft Iosco principles,” he said, referring to guidelines published by the European Banking Authority and the European Securities and Markets Authority earlier this year.

A spokesman for the ECB in Frankfurt didn’t have an immediate comment.

Euribor is derived from a daily survey of interbank lending rates for unsecured loans conducted for Euribor-EBF by Thomson Reuters Corp. It is based on estimates provided by participating banks of the rates they believe banks are charging each other, meaning rate-setting data isn’t necessarily based on actual transactions.

Mortgages and Derivatives

The rate is widely used as a reference point for mortgages and derivatives transactions. Euribor-EBF is an international non-profit operating under Belgian law.

“Euribor, with its current definition, should remain an estimation of the market price levels by a panel bank, as it was originally conceived, while strengthening the contribution guidelines, controls and overall governance of the index,” the group said in its response to the Iosco consultation.

The organization also says that banks should be given incentives to join rate-setting panels, in response to an exodus of lenders from Euribor-EBF panels since last year.

Iosco received more than 40 responses to the consultation, which was led by U.S. Commodity Futures Trading Commission Chairman Gary Gensler and Wheatley. Madrid-based Iosco, which brings together markets regulators for more than 100 nations to coordinate their rule-making, is planning to publish final standards later this year.

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