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Bates Research  |  12-04-15

Changing of the Guard for Euribor

The European Money Markets Institute (EMMI) recently published a position paper outlining proposed changes to the Euribor, one of the world’s major benchmarks for determining interest rates. Euribor, which stands for EURo InterBank Offered Rate, is the rate at which European banks lend to one another (technically, “the rate at which Euro interbank term deposits are offered by one prime bank to another prime bank.”) The benchmark is widely used as the underlying reference for setting mortgage and other retail lending rates, swaps and many derivatives.

In the wake of the financial crisis which began in 2008, it became apparent that the way the Euribor (and Libor) rates were calculated needed to be revised. Currently, the various rates are calculated by polling a group of panel banks and asking at what rate they believe one bank is quoting another for interbank term deposits within the euro zone. The various benchmark rates are based on maturities ranging from one week to 12 months.

The new proposal by EMMI would change the way the benchmark is set, in that it would be based on actual observable transactional data (where possible) and not simply what banks think the interbank rate is. In addition, the number of tenors (maturities) for which the rate is calculated would be reduced from eight to five, reflecting only those maturities for which there has historically been sufficient transactional volume to calculate a benchmark rate. Those five tenors would be:

  • 1 week
  • 1 month
  • 3 months
  • 6 months
  • 12 months

In the proposed new methodology, panel banks would submit the daily rates from actual transactions for the five tenors. If there are no transactions to report for a given day (actually, for that morning), then a gap-filling technique would be used, which would entail using the most recent average rate within the past four days. Once all rates (including gap-filled rates) are collected, the rates are sorted in ascending order from lowest to highest. Then, a median group of four or five central rates are determined depending on the number of submissions. Once that median group is determined, the benchmark would be calculated by taking the simple average of rates in the median group.

EMMI believes that the new methodology, which it calls Euribor+, would minimize the opportunities for market manipulation and provide more transparency to the financial community regarding how these vital benchmark interest rates are set.

The full details can be read in the recently released report, Consultative Position Paper on the Evolution of Euribor, which is found on the EMMI’s website.