Euribor Futures Sold Off as Reform Seen Unlikely Before 2019

  • EMMI rejects proposal for transaction-based pricing method
  • Futures slide in high volume as traders unwind long positions

The European Money Markets Institute’s decision Thursday to reject a proposed overhaul to the methodology of pricing Euribor has left analysts with little optimism that reforms will be implemented any time soon.

Euribor futures expiring up to the end of 2018 dropped by one to four ticks after the EMMI’s announcement as traders rushed to unwind long positions. The market was expecting that a change to a transaction-based pricing from a quote-based one would be adopted. The trading volume in September contracts surged, with more than 80,000 changing hands in a 10-minute period.

The proposals to change the pricing method that determines benchmark interbank lending rates were found not to be “feasible,” according to the EMMI. Traders had expected the new methodology to result in lower fixings and greater volatility. EMMI said it would now focus on developing a hybrid system.

“It has become clear that the true market levels are lower than the panel banks’ ‘expert-judgment’,” Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, said in a note to clients. “EMMI will now explore a ‘hybrid methodology,’ but this is unlikely to get implemented before 2019, if at all.”

European banks expressed concerns the changes would be unworkable as early as March and were seeking alternatives because of a lack of borrowings in the wake of negative rates and regulatory changes. A hybrid system could resemble that adopted for the London interbank offered rate, which is based on live transactions as a primary option, while historical deals are permissible as a fallback. The expert judgment of the submitting bank can only be relied on as a last resort.

The implied yield on the Euribor futures contract expiring in September rose 0.030 percentage points to minus 0.310 percent as of 4:19 p.m in London. Three-month Euribor fixed at minus 0.329 percent.

UniCredit SpA’s fixed-income strategist Luca Cazzulani said in an emailed note that he expects a stakeholder consultation on the hybrid methodology in the second half of 2018, while Societe Generale SA interest-rate derivative strategist Adam Kurpiel said in a note to clients that there were “a lot of uncertainties” and it would “take time to finalize a new methodology and then prove that it guarantees a seamless transition.”

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