This week, the European Central Bank’s (ECB) Working Group on Euro Risk-Free Rates convened in Frankfurt. This new Working Group, which is chaired by Koos Timmermans, Chief Financial Officer of ING Group and Vice-Chairman of ING Bank, has been established to develop an adoption plan for a risk-free overnight rate that can lead to an alternative to the benchmarks currently used in the Euro area.
The ECB has formed the Working Group as a direct consequence of the EU Benchmarks Regulation (BMR), which came into force this January. BMR seeks to put benchmarks used in financial instruments and contracts on a firmer footing, by improving the quality of input data and methodologies used by benchmark administrators and ensuring that contributors to benchmarks and the data they provide are subject to adequate controls.
However, with these new regulatory burdens comes the risk that banks will stop contributing to benchmarks. As Benoît Cœuré, Member of the Executive Board of the ECB, commented in his opening speech to the new Working Group: “In the past, we have seen banks become increasingly reluctant to participate voluntarily in benchmark panels, mainly due to potential litigation and compliance risks as well as increasing contribution costs.”
The aim of the Working Group on Euro Risk-Free Rates is to help secure the sound functioning of the EU’s financial markets by proposing alternatives to existing rates, which might become severely weakened, or removed altogether, as a result of BMR.
For benchmark users, the activities of this Working Group could not be more important. Organizations such as asset managers, banks and insurance companies are compelled by BMR to provide substitute benchmarks in the event an existing benchmark is withdrawn from market. However, there is currently a danger that some benchmarks may be withdrawn without an alternative being in place.
One such is the EONIA benchmark, administered by the European Money Markets Institute (EMMI). As Benoît Cœuré made clear in his remarks, EMMI has already stated that it has no intention of pursuing a thorough review of EONIA in the future; exposing market participants to legal and operational risks. The working group, therefore, has a crucial role to play in helping the market rebalance in the fallout of BMR.
RIMES’ advice to benchmark users is to keep a close eye on what will be a fast-changing situation. The benchmarks landscape two-years hence may be considerably different to the one we have in place today, and firms must be able to adapt rapidly and comprehensively. One way to do this is to partner with managed data service providers, such as RIMES. By working with us, firms can immediately access the latest in benchmark market intelligence and be sure that the data streams coming into your firm are fully compliant with BMR and other emerging regulations.
BMR and other regulatory topics will be discussed at RIMES’ upcoming EMEA Client Conference, which will take place in London on May 2. To register, email: firstname.lastname@example.org.
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