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Reform of interest rate benchmarks

Certain interest rate benchmarks including LIBOR, EURIBOR and EONIA are being or have recently been reformed. If any of your financial products or internal processes refer to these rates or other interest rate benchmarks, the following information is relevant for you.

Interest rate benchmark are used to determine (1) the amount of interest payable for a wide range of financial products such as derivatives, bonds, loans, structured products and mortgages, and (2) the valuation of financial products.

The most common examples of interest rate benchmarks used in financial contracts across the world are the London Interbank Offered Rate (LIBOR) and for the Euro, the Euro Interbank Offered Rate (EURIBOR) and Euro Overnight Index Average (EONIA).

Why are these benchmarks being reformed?

As benchmark rates are fundamental to so many financial contracts, they need to be robust, reliable and fit for purpose. Each of these interest rate benchmarks subject to reform were based on the rates at which banks lend to each other in the interbank market.

Financial regulatory authorities have expressed their concern that because interbank lending transactions have significantly decreased in recent years, the benchmark rates may no longer be representative or reliable. This concern has resulted in recommendations made by the Financial Stability Board towards the global financial industry to reform the major interest rate benchmarks and to develop a set of alternative rates that are more representative of the current financial environment.

The changes

European law, in the form of the Benchmark Regulation, sets out certain criteria and conditions for benchmark rates to ensure that they are reliable and robust. In order to meet these conditions and the concerns of regulators globally, benchmark rates are being reformed, where possible, to be based on robust methodologies supported by sufficient and reliable data.

The process of reforming EURIBOR was successfully completed in 2019 and is expected to remain in place for the foreseeable future. The successor rate for EONIA, the Euro Short-term Rate (‘€STR’), is now available and market participants are beginning the transition process.

Read the full article on ing.com