Consultative Position Paper on the Evolution of Euribor

 European Money Markets Institute CONSULTATIVE POSITION PAPER ON THE EVOLUTION OF EURIBOR 30 October 2015 56, Avenue des Arts 1000 Brussels | +32 (0) 2 431 52 08 | info@emmi‐benchmarks.eu The European Money Markets Institute (EMMI, formerly known as Euribor‐EBF) is an international non‐profit making association under Belgian law founded in 1999 with the launch of the euro and based in Brussels (56, Avenue des Arts, 1000 Brussels. As per EMMI’s statutes, EMMI is a non‐profit organization. Its purpose is twofold: I.
II.
The development and support of activities related to the money and interbank markets. To that end, the association shall have the task of making an evaluation of fluctuations in the interest rates in the money and interbank markets of the euro area and of providing the results of its research to the monetary authorities and interested parties who are active in these markets. In ancillary, the association shall also serve to support other practical initiatives fostering the integration of the European financial market such as but not limited to the improvement of the liquidity, safety and transparency of the European short term debt market by means of a harmonized framework for short‐term European paper ‘STEP’. EMMI currently provides the following two indexes: Euribor®, the money market reference rate for the euro and Eonia®, the effective overnight reference rate for the euro. EMMI is continuously working to enhance its governance framework and to improve the quality, integrity, and transparency of its benchmarks. Moreover, EMMI strives to develop suitable benchmarks adapted to the latest regulatory requirements context. DISCLAIMER This consultative paper describes the currently envisaged transaction‐based design of the Euribor benchmark and EMMI’s considerations on the transition towards such transaction‐based design. This paper’s purpose is to provide transparency on this transition including the methodological considerations, and to encourage stakeholders to provide feedback on a number of open issues. EMMI does not give any warranties or representations concerning this paper and the information contained in it. Neither EMMI nor any persons or entities acting on EMMI’s behalf may be held responsible for the information contained in this paper or the use made thereof. EMMI wishes to stress in particular that the impact assessment on the rate level and volatility characteristics of the transaction‐based methodology published in section 4.3 is a preliminary assessment based on historical data from 2012 and 2013. The current market conditions differ from those in 2012 and 2013. The preliminary impact assessment is published for informational purposes only. It is not intended to predict or forecast the spread between the current quote‐based Euribor methodology and the transaction‐based Euribor methodology, nor is the preliminary assessment fit for such a purpose. Preface
On 22 July 2014, the Financial Stability Board (FSB) published its report on Reforming Major Interest Rate Benchmarks. Among other things, the report recommended that the administrators of the so‐called IBOR benchmarks anchor their benchmarks in real transactions to the extent possible. The report also gave guidance with respect to implementing such a reform program. The FSB’s publication is part of the broader endeavor to reform financial benchmarks with respect to their determination methodology as well as governance and accountability arrangements, most noticeably expressed through: 
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the IOSCO Principles on Financial Benchmarks (2013), the ESMA‐EBA Principles for Benchmark‐Setting Processes in the EU (2013), and the draft European Regulation on Indices Used as Benchmarks in Financial Instruments and Financial Contracts, expected to come into force in 2016. Over the past three years, EMMI has made significant progress in enhancing the transparency as well as the governance and control framework of the Euribor benchmark rate‐setting process. As a next step, EMMI believes that the overhaul of Euribor’s determination methodology towards a transaction‐based benchmark will help ensure the highest degree of compliance with regulatory recommendations put forward by the FSB, IOSCO, ESMA‐EBA and defined in the draft European regulation on benchmarks, while adapting to changes in the financial markets underpinning Euribor. This consultative position paper summarizes EMMI’s plans for the reform of the benchmark’s determination methodology towards a Euribor based on transaction as well as EMMI’s planning for the implementation of the transaction‐based determination methodology. It further provides EMMI’s rationale and timeline to conduct a Seamless Transition (as described in the FSB report) in which Euribor remains the same benchmark while the determination methodology is adjusted. As outlined in more detail in this paper, a Seamless Transition requires that the definition, level and volatility of the benchmark under the current and the future methodologies are similar. The FSB report notes that such similarity constitutes a key criterion to assess whether the terms of financial contracts referencing Euribor continue to function [FSB14, page 27]. Accordingly, EMMI, in the process of developing the transaction‐based determination methodology, has emphasized the need to achieve sufficient similarity in these essential characteristics of the benchmark. Furthermore, the Market Participants Group, tasked in the context of the FSB report among other things with the identification of potential transition paths, recommended that “[i]n order to be successful, a major benchmark transition will require the support and coordination of leading market participants, financial services industry organizations, legal associations, and a range of official sector entities. A broadly coordinated approach is essential to avoid significant disruption and to promote wide market adoption of alternative benchmarks.”1 1
[MPG14, page 15] Page i While this paper is not intended to provide legal analysis or to replace the due diligence required from Euribor stakeholders in their role as benchmark users, EMMI agrees with the above MPG recommendation that it is paramount that Euribor stakeholders are enabled to conduct independent analyses to facilitate market preparation. Therefore, this paper also contains an estimation of the magnitude of impacts on rate level and volatility under current and new determination methodologies, based on data collected in 2012/13. While EMMI emphasizes that those estimates have to be understood for information purposes only, and are unsuitable to make predictions with respect to future Euribor rates, EMMI believes that these estimates sufficiently allow Euribor stakeholders to familiarize themselves with the characteristics of a transaction‐based Euribor and to assess the transition questions raised by a change in the determination methodology for their respective domain, jurisdiction or use of the benchmark. Prior to the planned switch‐over to the new transaction‐based determination methodology, EMMI will conduct a “pre‐live impact verification” to ensure that the estimated magnitude of the impact on rate and volatility calculated with 2016 data is comparable to the information published in this paper. EMMI’s governing bodies will decide to conduct the final switch‐over to a transaction‐based Euribor only in consultation with relevant authorities and on the grounds of such verification and after carefully assessing the capacity of Euribor stakeholders and the market to adapt to the upcoming change. EMMI welcomes the more granular insight Euribor stakeholders are able to provide. As part of its stakeholder outreach program, going forward, EMMI will continue to solicit feedback from and discussions with Euribor stakeholders and relevant authorities to further understand the progress being made assessing and adapting to the upcoming change in the Euribor determination methodology. Page ii Contents
Figures, Tables, and Charts .................................................................................................................................... iv List of Acronyms ...................................................................................................................................................... v 1 Introduction ...................................................................................................................................................... 1 1.1 Background of the Euribor Reform and the Euribor+ Project .............................................................. 1 1.2 Scope and Content of the Consultation ................................................................................................. 3 2 Evolution of the Euribor Specification ............................................................................................................. 5 2.1 Components of a Benchmark Specification ........................................................................................... 5 2.2 The Euribor Specification ........................................................................................................................ 5 2.3 Clarifying the Underlying Interest for Euribor ....................................................................................... 6 3 The Transaction‐based Determination Methodology ..................................................................................... 8 3.1 Euribor Panel ............................................................................................................................................ 9 3.2 Euribor Tenors ......................................................................................................................................... 9 3.3 Input Data and Submission ...................................................................................................................10 3.3.1 Eligible Transactions ..........................................................................................................................10 3.3.2 Submission Elements .........................................................................................................................12 3.4 Benchmark Calculation ..........................................................................................................................12 3.4.1 Data Sufficiency .................................................................................................................................12 3.4.2 Calculation Methodologies and Managing Volatility .......................................................................13 3.4.3 Transaction‐Based Euribor Core Methodology ................................................................................15 3.4.4 Data Insufficiency Contingency and Fallback Arrangements ..........................................................16 3.5 Transaction Collection, Calculation and Publication Time ...................................................................19 3.6 Publication of Submissions ...................................................................................................................20 4 Transition .........................................................................................................................................................21 4.1 Seamless Transition Path ......................................................................................................................21 4.2 Rate and Volatility Characteristics under Current and New Determination Methodologies ............22 4.3 Transition Plan .......................................................................................................................................24 4.4 Stakeholder Outreach during Transition ..............................................................................................26 5 Consultation ....................................................................................................................................................27 5.1 Consultative Questions .........................................................................................................................27 5.2 Responding to this Consultation ..........................................................................................................29 Annex I: Euribor Calculation Example ..................................................................................................................30 Page iii Annex II: ESA 2010 Counterparty Classification ...................................................................................................32 Annex III: Supporting Charts .................................................................................................................................35 Gap‐filling Methodology ....................................................................................................................................35 Quote‐based Euribor vs. Transaction‐based Euribor .......................................................................................37 Calculation Methodologies and Managing Volatility .......................................................................................39 Annex IV: Glossary of Terms .................................................................................................................................40 Annex V: Frequently Asked Questions .................................................................................................................44 References .............................................................................................................................................................46 Figures,Tables,andCharts
Figure 1 Phases in the development of the transaction‐based determination methodology page 8 Table 2 Reduction in Volatility page 14 Figure 3 Schematic representation of the Euribor calculation example page 16 Figure 4 Schematic overview of the transaction‐based methodology fallback arrangements page 18 Figure 5 Timeline of a Panel Bank’s transaction collection and submission activities page 20 Table 6 Rate Spread page 23 Table 7 Volatility Difference page 23 Figure 8 EMMI’s high‐level roadmap for the remaining portion of the transition period page 25 Chart 1 Number of contributors, raw vs. gap‐filling, 1‐month page 35 Chart 2 Number of contributors, raw vs. gap‐filling (3‐month and 12‐month) page 36 Chart 3 Comparison of transaction volume, raw vs. gap‐filling, 1‐month page 36 Chart 4 Comparison of transaction volume, raw vs. gap‐filling (3‐month and 12 month) page 37 Chart 5 Current Euribor vs. Transaction‐based Euribor, 1‐month page 37 Chart 6 Current Euribor vs. Transaction‐based Euribor (3‐month and 12‐month) page 38 Chart 7 Transaction‐based Euribor (1‐ and 3‐month), EONIA page 38 Chart 8 Comparison of Calculation Methodologies (1‐month) page 39 Chart 9 Comparison of Calculation Methodologies (3‐month and 6‐month) page 39 Page iv ListofAcronyms
EBA European Banking Authority http://www.eba.europa.eu/ ECB European Central Bank http://www.ecb.europa.eu/ EFTA European Free Trade Association http://www.efta.int/ EMMI European Money Markets Institute http://www.emmi‐benchmarks.eu/ ESMA European Securities and Markets Authorities https://www.esma.europa.eu/ EU European Union http://europa.eu/ FSB Financial Stability Board http://www.financialstabilityboard.org/ IOSCO International Organization of Securities Commissions https://www.iosco.org/ MPG Market Participants Group Page v 1 Introduction
1.1 BackgroundoftheEuriborReformandtheEuribor+Project
Euribor is a major euro interest reference rate, administered by the European Money Markets Institute (EMMI). In light of its wide use in the global financial system as a benchmark for a large volume and broad range of financial products and contracts, Euribor is commonly regarded as a critical benchmark of systemic importance for financial stability. Accordingly, EMMI is strongly committed to maintaining a robust governance and control framework for the administration of the Euribor benchmark, meeting global regulatory expectations and best practices. To this end, over the past three years EMMI has implemented wide‐ranging reforms related to its benchmark administration activities. These reforms aim to ensure EMMI has established and is operating a best‐in‐class governance, oversight, and control framework that is in alignment with the ESMA‐EBA Principles [ESMA13] and the IOSCO Principles for Financial Benchmarks [IOSCO13], as well as the forthcoming European Regulation on indices used as benchmarks in financial instruments and financial contracts [EUCom13]. As part of the reform program, EMMI has already: 
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Governance: Strengthened EMMI’s benchmark governance, control framework, and organizational arrangements by developing EMMI governance structures and the implementation of a suite of policies, procedures, and practices; Quality of the Benchmark: Established a comprehensive back‐testing and market analysis program in order to monitor the market for the Underlying Interest which Euribor seeks to represent; Quality of the Methodology: Implemented policies and practices, which are designed to further enhance the robustness of the Euribor benchmark methodology, and the process by which changes are made to the methodology; Accountability: Implemented a considerably enhanced Code of Conduct, with specific standards for third parties involved with the determination of Euribor, including Panel Banks and Calculation Agent. EMMI has thus made significant progress in enhancing the transparency as well as the governance and control framework of the Euribor benchmark rate‐setting process. Nonetheless, the current Euribor methodology remains based on collecting quotes from contributing banks and the use of expert judgment. On 22 July 2014, the Financial Stability Board (FSB) published its report Reforming Major Interest Rate Benchmarks. In line with the IOSCO Principles for Financial Benchmarks, the FSB report recommends to strengthen “IBORs and other potential reference rates based on unsecured funding costs by underpinning Page 1 them to the greatest extent possible with transactions data (IBOR+)”2. To this end, the report acknowledges that “the administrators may have to consider a wide set of methodological changes to or clarification of what the benchmark is intended to represent.” (See [FSB14, page 2].) In this context, EMMI initiated the “Euribor+ Project” with the objective of developing and evaluating a transaction‐based benchmark determination methodology for Euribor, guided by the FSB’s criteria to ensure reference rates command widespread private and official sector support [FSB14, pages 3f]: (1) The benchmark rates should minimize the opportunities for market manipulation; (2) The benchmark rates should be anchored in observable transactions wherever feasible; (3) The benchmark rates should be robust in the face of market dislocation and should command confidence that they remain resilient in times of stress. Whilst recognizing the need for careful management of any transition, the FSB report stresses that benchmark rates should meet these criteria as soon as possible. To achieve the goals set by the FSB and the other regulatory bodies, the Euribor+ Project has been divided into two stages: 1. The first stage focused on the formulation of a robust and reliable methodology using transactional data gathered through two extensive data collection exercises from over 50 banks. The initial development and design work was conducted with the guidance of a dedicated taskforce (hereafter “the Euribor+ Taskforce”) and involved analyses of these data, formulation of the new methodology and a series of stakeholder outreach exercises. This phase is now complete and the resulting core elements of the design are presented below. 2. The second stage, which has been under way since early 2015, is composed of the pre‐implementation planning needed for the introduction of the new methodology. During this stage, EMMI has focused on transition planning and specifying the operational and infrastructure requirements necessary for the transition. EMMI will hold further workshops with Euribor stakeholders in order to present the new methodology and the transition plan and solicit further feedback. EMMI believes that the introduction of the new transaction‐based determination methodology for Euribor should be conducted on Monday, 4 July 2016, following a “Seamless Transition” approach under which the Euribor benchmark is retained while the underpinning determination methodology is adjusted. Such a transition mitigates many of the legal, operational, and reputational risks that would otherwise be incurred with the introduction of a new, distinct benchmark. Transition considerations are outlined in Section 4 below. To ensure that this project and the transition to a transaction‐based Euribor progress according to established milestones and address issues in an effective and timely manner, EMMI has established a sound and robust governance structure. This governance structure is composed of different entities to assess methodological 2
The FSB recommends “strengthening existing IBORs and other potential reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transactions data” (these enhanced rates are addressed as “IBOR+”). See [FSB14, page 2]. Page 2 considerations or elements of the transition. The governing bodies include the EMMI Board of Directors, the EMMI General Assembly and the Euribor Steering Committee. The EMMI Board of Directors and EMMI General Assembly are responsible for reviewing and approving high critical issues related to the final transaction‐based methodology and the transition, including any requisite changes to the Euribor Code of Conduct and other governing documents. The EMMI General Assembly and EMMI Board of Directors delegate responsibility for the day‐to‐day management of this project to the Euribor Steering Committee. The Euribor Steering Committee serves as the primary governing body with oversight responsibility over methodological aspects and the transition from current Euribor to a transaction‐based Euribor. In addition, the EMMI Secretariat has been closely supported by the European Central Bank (ECB) and Working Groups (e.g. Euribor+ Taskforce) composed of market stakeholders to address issues related to the technical and methodological design of the transaction‐based Euribor. Finally, it should be noted that the proposal put forward in this paper is essentially a change to the determination methodology for Euribor. The general institutional arrangements for the governance, oversight and operation of the Euribor benchmark will remain unchanged. In particular: 
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EMMI will continue as the benchmark administrator, with the existing ultimate responsibility for the oversight and operation of the benchmark; The Euribor Steering Committee will continue its current roles in promoting and monitoring adherence to the Euribor Code of Conduct, and will discharge its duties as specified therein; Daily determination of the benchmark will be undertaken by the appointed Calculation Agent for Euribor, and will operate according to documented contractual obligations and policies; Panel Banks will continue to supply specified data (as required under the new methodology) for the daily calculation of Euribor, and will operate according to the Code of Obligations of Panel Banks. The relevant Codes, policies and procedures will be revised to reflect the new methodology and will be published in a timely manner in advance of the transition. 1.2 ScopeandContentoftheConsultation
This paper describes the envisaged transaction‐based design of the Euribor benchmark and EMMI’s transition considerations. The proposed transition approach envisages the implementation of the transaction‐based design as an evolution of Euribor by changing the current quote‐based Euribor methodology to the transaction‐
based methodology devised in context of the Euribor+ Project. While the great majority of the elements of the transaction‐based methodology have been defined, EMMI wishes to receive feedback from stakeholders on a number of open issues (see Section 5). The remaining paper is divided into the following sections: 
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Section 2 describes the Euribor specification and the objectives of the methodological change; Section 3 describes the transaction‐based methodology; Page 3 
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Section 4 describes EMMI’s transition strategy and the transition timeline; Section 5 details a set of consultative questions to which EMMI wishes to receive feedback from stakeholders and how to respond to this consultation and under what timeframes. After the end of the consultation period, EMMI will publish a summary of the responses. All comments and feedback will be taken into consideration when finalizing the transaction‐based methodology and for all further transition planning that will take place during Q1 2016. Page 4 2 EvolutionoftheEuriborSpecification
2.1 ComponentsofaBenchmarkSpecification
Following the IOSCO Principles for Financial Benchmarks, it is helpful to distinguish between two aspects of a benchmark, namely: a. the Underlying Interest, which defines the economic variable that a benchmark seeks to measure; and b. the determination methodology, which is applied to make a practical measurement of the Underlying Interest. In combination, these are considered to be the benchmark specification. The Underlying Interest represents the more fundamental element of the specification, as it defines the objective for establishing the benchmark. The determination methodology is a means to measure this objective. A number of approaches will typically be available to make such a measurement. A benchmark administrator should choose a determination methodology that faithfully portrays the Underlying Interest, taking into account the structure and dynamics of the market for the Underlying Interest. In particular, if the market for the Underlying Interest undergoes structural alteration over time, it may be necessary to adapt the determination methodology to reflect such a change so that the benchmark continues to serve as a sound measure of the Underlying Interest (see IOSCO Principle 10). 2.2 TheEuriborSpecification
The current Euribor specification, as defined in the Euribor Code of Conduct [EURCoC], states that Euribor is: “the rate at which euro interbank term deposits are being offered within the EU and EFTA countries by one Prime Bank to another at 11.00 a.m. Brussels time.” This specification has three acknowledged shortcomings: 
It does not clearly state the Underlying Interest for Euribor. As discussed below, Euribor and its forerunner legacy IBORs arose at least partly from a desire to measure bank unsecured funding costs, in turn to serve as a basis for pricing commercial loans by banks. This concept of a cost of funding is not immediately evident in the current specification; 
The specification does not distinguish between the Underlying Interest and issues concerning the determination methodology. This leads to uncertainty as to what is fundamental to the specification, namely the Underlying Interest, versus what is a design choice for measuring the benchmark, and which can then potentially be altered to adapt the benchmark to current market conditions; 
Certain terms such as “Prime Bank” are not fully defined, leading to variations in interpretation. Page 5 As part of the Euribor+ Project, EMMI believes it necessary to revise the Euribor specification in order to resolve these shortcomings. This will serve to align the benchmark with the best practices outlined in the IOSCO Principles and will provide a basis for future flexibility in adapting the determination methodology to evolving market conditions. Specifically, EMMI seeks to make the statement of the Underlying Interest explicit and to provide a clear account of the new transaction‐based determination methodology. In undertaking this revision to the specification, EMMI first and foremost wishes to emphasize that there is no intent to change the Underlying Interest for Euribor. This point is crucial to the continuity of the benchmark and underpins the ability to proceed with the new determination methodology under the “Seamless Transition” approach. Accordingly, EMMI would like to clarify the Underlying Interest for Euribor as: “the rate at which banks of sound financial standing could borrow funds in the EU and EFTA countries in the wholesale, unsecured money markets in euro.” The detailed rationale for this statement is discussed further in the subsection below. 2.3 ClarifyingtheUnderlyingInterestforEuribor
EMMI has used the following considerations, grounded in the historical context for the development and use of Euribor, in arriving at the explicit statement of the Underlying Interest: 2.3.1.1 Euribor as a Funding/Borrowing Rate As the FSB report and other publications point out, the family of IBOR indices are based upon and aimed at representing funding markets. This is supported by the fact that LIBOR, the first of the IBORs to come into existence, originally evolved as a standardized benchmark for the pricing of floating‐rate corporate loans. 3 EMMI therefore notes that the original intent for Euribor was in broad terms to reflect a funding rate, i.e. a borrowing rate for banks. The current Euribor specification does not state this point as explicitly as would be desirable. By referencing deposits being offered by one prime bank to another, the current specification obscures the fact that the Underlying Interest is reflected by the rate at which the second prime bank could receive – i.e. borrow – the funds offered by the former. 2.3.1.2 Wholesale Sources of Funding With respect to eligible counterparties, the use of interbank transactions in the original Euribor specification reflects the structure of the money markets in the 1980s and 1990s when bank‐to‐bank activity was a predominant source of bank wholesale funding. However, the last decade has witnessed a steady decline of 3
See http://www.imf.org/external/pubs/ft/fandd/2012/12/basics.htm, and [MPG14, page 24]. This also coincided with the evolution of new interest rate‐based financial instruments requiring standardized and transparent financial benchmarks. Page 6 interbank activity and a significant shift in banks’ funding sources while banks have increased their reliance on broader wholesale financing (see [MPG14, page 13]). In adapting the specification of Euribor to the current marketplace, EMMI therefore wishes to clarify that Euribor’s Underlying Interest needs to be understood as a wholesale funding rate where interbank deposits constitute one possible source of funding. The explicit reference to interbank rates in the current Euribor Code of Conduct represents a methodological consideration, reflecting the predominant source of bank funding at the time of Euribor’s creation. 2.3.1.3 Banks of Sound Financial Standing The current specification of Euribor includes the term “Prime Bank,” with notional transactions among such Prime Banks forming the basis for estimating the benchmark. However, “Prime Bank” has not been precisely defined. The Prime Bank historically represented both a concept of the financial standing of the party borrowing funds — related to the Underlying Interest — and of a substantial party supplying funds — related to the determination methodology. Hence, consistent with making explicit the distinction between the Underlying Interest and the determination methodology, EMMI wishes to clarify that: a. The concept of a Prime Bank as the party borrowing funds will be retained. This concept continues to be reflected as a criterion that the banks that form the Euribor panel — the “sample” borrowing banks under the new methodology — are of sound financial standing; b. The concept of the Prime Bank as a substantial party supplying funds is a methodological consideration, not a part of the Underlying Interest. As such, this role will be subsumed in the detailing of broader sources of wholesale funds within the new transaction‐based determination methodology. Practically, the notion of sound financial standing will be reflected in the eligibility criteria governing which banks may be deemed as a Panel Bank. These criteria will be developed and evaluated by the Euribor Steering Committee, which will also consider continuity from the criteria in the existing Euribor Code of Conduct. In general terms, banks in the euro area categorized as “significant” by the ECB under the Single Supervisory Mechanism4 would be regarded as satisfying these criteria. However, this will not be an exclusive condition. The Euribor Steering Committee will take a range of market and institutional factors into consideration involving the criteria for panel membership. In similar vein, for a bank in the EU and EFTA, but outside the euro area, the bank’s asset size in relation to national GDP, domestic market standing, and cross‐border activity will be taken in to account. 4
Refer to ECB’s “Guide to banking supervision” (November 2014), which defines “Significant” banks, at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmguidebankingsupervision201411.en.pdf?404fd6cb61dbde00
95c8722d5aff29cd. Page 7 3 TheTransaction‐basedDeterminationMethodology
This section intends to give an overview of the methodological aspects of the transaction‐based benchmark, providing, in particular, a list of eligible transaction types and details about the core calculation methodology and a description of the fallback arrangements – necessary in the design of any transaction‐based benchmark. Other aspects of the benchmark calculation and publication are also presented. The design of the transaction‐based determination methodology for Euribor proceeded in three phases (see Figure 1). Figure 1. Phases in the development of the transaction‐based determination methodology Objectives
 Meet best practice design principles (IOSCO and ESMA‐
EBA)
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 Meet thresholds for participation and volume
Representative of broad Euro money market
 Responsive to market  Minimize use of contingency  Qualitative considerations of technique characteristics
 Quantitative measures of volatility of benchmark level
arrangements
movement
 Meet user needs
1
2
Foundation Selection
Design Choice
 Rely solely on transaction data, rather than quotes or submission estimates
 Focus on borrowing data, from range of wholesale funding sources
 Wide area panel coverage, based on volume but representative jurisdictionally
Sufficiency of Data
3
Final Benchmark Determination Methodology
Calculation Methodology
 Tenors limited to those with liquidity concentrations
 Extended Value Date windows
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 Choice of averaging technique
Extended Maturity Date windows
 Outlier removal, managing volatility
 Use of Data “Gap Filling” techniques
In the first phase, described in sections 3.1 to 3.3 below, the choices of transaction types and the criteria for the panel of banks are described. The transaction‐based Euribor benchmark will reflect the average unsecured wholesale funding rates of banks in euro across the European Union (EU) and countries in the European Free Trade Association (EFTA). For that purpose, these rates will be calculated from a representative sample of designated “eligible transactions” for a given daily period. Each Panel Bank will submit, for each respective Euribor tenor, the volume‐weighted average rate and aggregate transaction volume. Page 8 In the second phase, described in section 3.4.1 below, techniques to augment the data on which the benchmark is based are applied. To enhance data sufficiency across all tenors, the transaction‐based Euribor methodology will leverage data from prior days in the calculation of the benchmark rate, where necessary.5 In the third phase, described in section 3.4.2 below, choices of averaging technique and methods to remove outliers in the rate data are elaborated. In order to reduce the volatility effects resulting from a daily change in contributing banks6, an average rate will then be computed for each tenor using a calculation methodology involving the central group of rates corresponding to non‐zero volume contributions – referred to as the median group. Because of the dynamic nature of the wholesale euro money market and to ensure that Euribor continues to be an accurate and reliable representation of the funding conditions in this market, the specific modalities for deriving the Euribor rates will be subject to periodic revision and may be adjusted over time. EMMI, as the administrator of Euribor, is committed to the transparency of Euribor’s determination process (see IOSCO Principles 6 and 9). To this end, EMMI includes a discussion on the publication of underlying data in section 3.6. 3.1 EuriborPanel
EMMI envisages a Euribor Panel consisting of banks that are active7 participants in the euro money market. Reporting will take place at the consolidated level for all EU and EFTA branches, including EU and EFTA subsidiaries, unless specified differently by the Euribor Steering Committee in consultation with individual Panel Banks. Further criteria will be included and elaborated in the revised Euribor Code of Conduct. The number of banks on the Panel should be high enough to constitute a representative sample for the purposes of determining an average rate and to reflect the geographic diversity8 of the euro money market. 3.2 EuriborTenors
After the implementation of the transaction‐based determination methodology, the Euribor benchmark will be calculated for the following five tenors: 1 Week 1 Month 3 Months 6 Months 12 Months 5
For further details see section 3.4.1. Each day the benchmark is calculated, only Panel Banks with non‐zero transaction volume will be considered (hereafter, “the contributing banks” or “the contributors”). See section 3.4.1 below. 7
Active refers to a bank that can prove to have borrowing activity in the wholesale interbank money market, or positive outstanding amounts issued through short term paper programmes (e.g. French CDs or euro Commercial paper), or other unsecured wholesale short term instruments, also issued by a branch/subsidiary within EU/EFTA area. 8
The current Code of Conduct [EURCoC] establishes in its fallback provisions that Panel Banks from at least 3 countries shall provide data to calculate and publish Euribor. While geographical thresholds shall be re‐assessed by the Euribor Steering Committee, at least panel banks from 3 countries shall provide data to calculate the transaction‐based Euribor. 6
Page 9 The rationale behind the discontinuation of the 2‐week, 2‐month, and 9‐month tenors arises from the analyses carried out by EMMI during the development of the transaction‐based methodology: EMMI identified insufficient transactional volume to support a full transaction‐based approach for these three tenors. 3.3 InputDataandSubmission
3.3.1 EligibleTransactions
As defined in the Underlying Interest component of the Euribor specification, Euribor seeks to represent the cost at which banks of sound financial standing could borrow funds in the wholesale unsecured euro money markets. The filters and guidelines used by Panel Banks to determine which unsecured wholesale borrowing transactions should be selected for inclusion in the Euribor rate submission determination process are specified below. Panel Banks should apply these filters, in the stated order, to their universe of transactions before calculating their daily Euribor rate submission. These filters should be considered according to the euro money market conventions, i.e. TARGET29 rate calendar, ACT/360 day count convention, and modified following business day with month‐end adjustment convention. Filter Description 1 Eligible currency denomination Only transactions directly denominated in euro will be regarded as eligible.10 2 Timing of eligible transactions In order to ensure that all Panel Banks select transactions for the same daily timeframe, only transactions executed on TARGET day T are eligible for a Euribor rate submission on TARGET day T+1. 3 Given the Underlying Interest that the Euribor benchmark seeks to represent, only transactions conducted in the wholesale unsecured money markets and based on the following types of unsecured borrowing are eligible: Eligible types and  Unsecured cash deposits attracted from the following counterparties, counterparties irrespective of their geographic location: o Deposit‐taking Corporations, except those of the Central Bank subsector; o Other Financial Institutions; o Official Sector Institutions; 9
TARGET stands for Trans‐European Automated Real‐time Gross settlement Express Transfer System. The euro system maintains TARGET2, which is the second generation of TARGET and is a real‐time gross settlement system. Throughout this document, references to “TARGET” should be read with respect to the euro system’s TARGET2 system. 10
Funding transactions involving FX swaps will not be included for the moment. Page 10 Filter Description o
o
o
Non‐financial Corporations that are not categorized as small business customers in the Basel III LCR regulations; Insurance Corporations; and Pension Funds. 
Short‐term securities (i.e. CPs, ECPs, CDs, ECDs, and others) irrespective of the type and location of the counterparty. Deposits or securities with embedded options or conducted at a floating rate should however not be included for selection in the Euribor submission rate determination process. The eligible transaction counterparties above have been selected for their representation of the primary funding sources in the wholesale money markets. Further details about each of these counterparties can be found in Annex II.11 4 Eligible settlement dates For all eligible transactions, the standard value date window for each TARGET day is T, T+1, and T+2. For each of the tenors for which Euribor is calculated, Panel Banks will have to include eligible transaction data according to the following window guidelines: 5 Tenor
1 Week
1 Month
3 Months
6 Months
12 Months
Eligible tenors and maturity dates windows Maturity Window 1 Week ± 1 Day 1 Month ± 1 Week 3 Months ± 1 Week 6 Months ± 2 Weeks 12 Months ± 2 Weeks For example, within the bucket of eligible wholesale borrowing transactions at the 1 Month tenor, executed on a given day, the Panel Bank should report those transactions with a maturity date of 1 Month ± 1 Week. Transactions that remain after the filters described above have been applied to a Panel Bank’s universe of transactions will be those selected for the individual Panel Bank’s Euribor rate submission calculation. 11
The counterparty classification above is based on the definitions of institutional sectors and subsectors described by the European System of Accounts (ESA 2010) developed by the European Union’s Eurostat group. This classification is also consistent with the MMSR program reporting guidelines. Page 11 3.3.2 SubmissionElements
Panel Banks will be responsible for calculating their daily Euribor submission rate for each active Euribor tenor. An individual Panel Bank’s contribution toward the index will consist of two elements, per tenor: Reported Data Elements Description Rate The submission rate is the volume‐weighted average rate (VWAR) of the set of eligible transactions described in Section 3.3.1. It is calculated as ∑i (ri × Voli )
Submission Rate = ∑i Voli
where ri and Voli are the borrowing rate and nominal size of the eligible transaction i, respectively. The weighted sum is then divided by the sum of all transaction volume in the defined set of eligible transactions for the trade date, indexed by i. Submitted rates will be rounded to three decimal places. Transaction Volume The sum of notional amounts of all eligible transactions which were used to derive the submission rate.12 Transaction volumes will be rounded to the nearest euro. If on a given day a contributing bank has no eligible transactions recorded for a given tenor, it will transmit a no‐transactions indicator. 3.4 BenchmarkCalculation
3.4.1 DataSufficiency
One of the major issues in the development of a benchmark anchored in real transactions arises from a natural variability in daily market volumes and, in particular, from the possibility of low daily transaction volumes. The core calculation methodology of the transaction‐based Euribor is designed to ensure daily data sufficiency while still relying on real transactions and remaining representative of the market. To this end, the methodology uses, when needed, the Panel Banks’ transactional data from previous days in a technique referred to as gap‐filling. As mentioned in Section 3.3.2, an individual Panel Bank’s contribution toward the calculation of Euribor consists of a rate, obtained as the volume‐weighted average rate of the set of eligible transactions, and the transaction volume, being the sum of notional amounts of all eligible transactions. In those cases where the Panel Bank has no transactions to report, the gap‐filling technique uses the most recent volume‐weighted average rate within a given number of days. 12
With no minimum threshold set either for individual transactions or aggregated volumes. Page 12 Gap‐filling example (1). The following table exhibits the application of 4 day gap‐filling to a hypothetical panel of 4 banks contributing to the calculation of Euribor on day T+1 (publication day). Banks A and C had transactions on day T. We observe that while Banks B and D did not have transactions reported on TARGET day T, the gap‐filling methodology exploited their data from days T‐2 and T‐4, respectively, toward the computation of the benchmark. Panel Banks Bank A T T‐1 T‐2 Days T‐3 T‐4 T‐5 Bank B X
X
Bank C X
X
X
X
X
X
X
X
X
Bank D X
X
Cut‐off date 3.4.2 CalculationMethodologiesandManagingVolatility
The gap‐filing technique described above, by increasing the effective number of daily contributors to each rate determination, serves to reduce the volatility inherent in any transactions‐based approach. However, even with this stabilizing effect, the resulting rate series can still exhibit significant “idiosyncratic” – non‐market – volatility, certainly when compared to the quote‐based methodology 13 used in the current Euribor determination. Accordingly, EMMI considered a variety of statistical outlier removal and averaging techniques with a view to reducing further this unwanted idiosyncratic volatility14. Among these techniques, EMMI ultimately focused on three different rate computation methods:‐ 

Current (quote‐based) Euribor is calculated using the first method taken into consideration, i.e. as the 15% trimmed mean15 of the contributions of banks in the Euribor Panel. The analysis undertaken by EMMI showed, however, that the calculation of the transaction‐based Euribor using this methodology would increase considerably the volatility of the benchmark.16 As a consequence of these results, EMMI studied the possibility of calculating the transaction‐based benchmark as the median, which is a more robust statistical measure of location, less affected by the 13
On the other hand, as noted in the ESMA‐EBA 2013 Principles [ESMA13], current Euribor features periods of stasis that might not be reflective of the market (see Paragraph 62, page 14). 14
As established in [MPG14], “some of this volatility can be mitigated by smoothing and trimming methods, including reliance on significantly lagged transactions data.” 15
To calculate the 15% trimmed mean the submission rates are arranged in ascending order from lowest to highest. The highest and lowest 15% of these rates are discarded and the benchmark is obtained as the simple average of the remaining rates 16
Note that, in the case of the transaction‐based Euribor, the calculation happens after gap‐filling, and only involving rates associated to non‐zero transaction volumes. Page 13 
presence of outliers.17 While the results of the analysis using this second methodology were promising, as the volatility was reduced considerably, EMMI decided not to use this method since the resulting rate would be prone to potential manipulation, as it would be determined by the rate submitted by one or two banks. To reduce this potential for manipulation while leveraging the robustness of the median, EMMI introduced the median group calculation, which relies on the submissions of a range of banks: Median group. After application of gap‐filling, the submission rates associated to non‐
zero transaction volumes are arranged in ascending order from lowest to highest. The median group of this ordered list is identified as: a) The group of four central rates, when the ordered list of submission rates is composed of an even number of elements; b) The group of five central rates, when the ordered list of submission rates is composed of an odd number of elements. The benchmark is then obtained as the simple average of the elements in the median group. Rates obtained using this median group calculation technique proved to be the least volatile of the three. The following table summarizes the results of EMMI’s analysis on the volatility of daily rate changes. As the table shows, the mitigating effect of gap‐filling on volatility is also evident. Further details and charts can be found in Annex III. 1 Week
1 Month
Tenor
3 Month
6 Month
12 Month
Euribor+ without Gap Filling, using Trimmed Mean
3.5
9.7
17.0
31.9
44.1
Euribor+ with Gap Filling, using Trimmed Mean
1.2
3.1
4.8
8.5
11.8
Euribor+ with Gap Filling, using Median
0.9
1.7
1.9
2.5
3.6
Euribor+ "Core" ‐ Gap Filling and Median Group
0.8
1.5
1.7
2.3
2.8
Current Euribor
0.7
0.6
0.6
0.6
0.6
Volatility of Daily Rate Changes
Methodology
Table 2. Reduction in Volatility
17
To calculate the index using the median, after application of gap‐filling, the submission rates associated to non‐zero transaction volumes are arranged in ascending order from lowest to highest. The benchmark is identified with the median rate of the list. Page 14 3.4.3 Transaction‐BasedEuriborCoreMethodology
This section provides a full description of the transaction‐based Euribor core methodology, based on the discussion in sections 3.4.1 and 3.4.2. The first step of the core methodology consists of the determination of the full and final dataset of submission rates across each tenor according to the following rules: a) If a Panel Bank reports borrowing transactions on a given trade date, the calculation methodology uses the Panel Bank’s submission with no changes, as described in Section 3.3.2. b) Across the 1‐week, 1‐month, 3‐month, and 6‐month tenors, for those Panel Banks that do not have any eligible borrowing transactions to report on the given trade date, the most recent VWAR within the last 4 TARGET days is used (“gap‐filling”). c) For the 12‐month tenor, the gap‐filling approach extends to the last 6 TARGET days in order to enhance data sufficiency, while ensuring Euribor is representative of current market activity. If for a particular day and tenor, after step b) or c), a Panel Bank still does not have any eligible transactions to report, this bank is excluded from the calculation of the index for that day. Secondly, for each tenor, from the resulting dataset the Euribor rate is obtained by: (i) Arranging the Panel Banks’ submission rates associated to non‐zero transaction volumes – after applying gap‐filling rules if necessary – in ascending order from lowest to highest. (ii) Calculating the median group average, which is the simple average of a) The four central rates when the ordered list of submission rates is composed of an even number of elements; b)
The five central rates when the ordered list of submission rates is composed of an odd number of elements. Gap‐filling example (2). The following table exhibits the application of 4 day gap‐filling to a hypothetical panel of 6 banks contributing to the calculation of Euribor on day T+1 (publication day). Banks A, B, and D did have transactions on day T. We observe that while Banks C and E did not have transactions reported on TARGET day T, the gap‐filling methodology exploited their data from days T‐1 and T‐4, respectively, toward the computation of the benchmark. Bank F, however, is excluded due to lack of transactions before the cut‐off date and not considered for the determination of the benchmark. Panel bank contributors Days Bank A Bank B Bank C Bank D Bank E Bank F T X X X T‐1 X X X X T‐2 T‐3 X X X X X X T‐4 X X X X Cut‐off date T‐5 X X X X Page 15 Euribor calculation example. On day T and for the 3‐month tenor, a hypothetical Panel of 18 banks submit their contributions (rate and transaction volume) toward Euribor. Four banks have no transactions to report on day T, nor did they transact in the previous 4 days, and are therefore excluded from the calculation. The rate submissions from the remaining 14 Panel Banks are ordered from lowest to highest. Euribor is obtained as the average of the four central rates in that ordered list. Figure 3. Schematic representation of the Euribor calculation example Panel banks with non‐zero transaction volume, either on day T or after appropriate gap‐filling.
Panel banks with zero transaction volume on day T and after applying gap‐filling rules. Euribor – obtained as the simple average of the four submissions in the median group, for the number of submissions to be an even number (14). A more detailed example of the Euribor benchmark calculation using the transaction‐based determination methodology is provided in Annex I. 3.4.4 DataInsufficiencyContingencyandFallbackArrangements
The need for fallback arrangements as part of the transaction‐based methodology is inherent to the nature of any transaction‐based benchmark. In case of data insufficiency, and in order to guarantee the publication of Euribor under exceptional circumstances, EMMI has designed a tiered contingency approach that ensures the benchmark’s distribution without disruption in the market. The fallback arrangements devised by EMMI are structured in two tiers: Trigger Fallback Arrangement Thresholds for minimum daily volume and minimum number of contributors will be established by EMMI after the analysis of the pre‐live verification test of a transaction‐based Euribor to be carried out over the course of Q2‐Q3 2016, and possibly other collected market data, including short term paper and publicly Tier 1 available market data sources. (i)
Aggregate daily volume threshold. (ii)
Panel Bank contributor threshold. (Only the reporting of non‐zero transaction volumes is considered as a contribution for the purposes of this threshold.) The Core Transaction‐Based Methodology described in Section 3.4.1 would be replaced by a formulaic approach presented below. This formulaic approach relies on data already provided by the contributing banks. The fallback determination takes place in the same timeframe as the core determination method and is addressed by the calculation agent. Page 16 Trigger Fallback Arrangement If on a given day and tenor, either the aggregate daily transaction volume reported by Panel Banks or the number of Panel Banks contributing to the calculation of the Euribor index are below the thresholds set in (i) and (ii), respectively, Tier 1 Contingency is triggered. Note that the comparison of aggregated daily volume and number of contributors with the thresholds above is to be performed after gap‐filling. Tier 2 After a persistent Tier 1 contingency environment putting at risk the representability of the benchmark. Panel Banks will be convened in special session to provide quote submissions. The Euribor Steering Committee will be convened with the purpose of analyzing the reason for the contingency and deciding on a course of action with respect to the benchmark. The core methodology may be adapted appropriately to perform the benchmark determination. EMMI, with the technical support of the ECB, has performed a parametrisation analysis for the contingency triggers based on the 2012‐2013 data. This analysis focused on estimating the volume and contributor number thresholds that could apply at each tenor, based on a set maximum frequency of contingency events. It is important to emphasize that the implementation of these fallback arrangements is intended to be an exceptional situation, with an expected implementation of Tier 1 at most once every two years and Tier 2 on much rarer occasions. In the analysis, therefore, estimates of the thresholds are calibrated to these frequencies. This analysis was conducted as a proof of concept for the trigger estimation methodology. Since the analysis used the data from the 2012‐2013 period, the numerical levels of the thresholds may not be fully relevant to the market conditions and panel size that will pertain in 2016 prior to the launch of the new Euribor methodology. Accordingly, this statistical analysis will be reviewed and updated during the pre‐live verification of the transaction‐based Euribor methodology over the course of Q2/2016. The actual thresholds will be published then, on the basis of this assessment. Going forward, these levels will be reviewed by the Euribor Steering Committee on a periodic basis to ensure that these thresholds, and Euribor itself, continue to adequately reflect the market for the Underlying Interest. Page 17 Figure 4. Schematic overview of the transaction‐based methodology fallback arrangements. If Euribor is calculated using any of these two fallback methodologies, EMMI will indicate this fact at the time of the benchmark publication. Tier 1 Fallback Arrangement The formulaic approach provides a volume‐weighted average that incorporates volume and rates submitted on the preceding days of the contingency period to increase volume sufficiency while maintaining a view of current market conditions. Given that v is the raw volume (no‐gap filling) on day T; v is the gap‐filled volume on day T; r̅ is the rate calculated using only non‐zero volume contributions on day T (i.e. median group without gap‐filling);r is the rate based on the standard methodology on day T (i.e. median group with gap‐filling); and R is the final published rate on day T. If the Tier 1 fallback arrangement is triggered, this arrangement relies on the following formula on the first day of contingency: v r
v r̅
R
, where r0=R0. v
v
In such a scenario, note that as the ordinary volume on Day 1 (v ) approaches 0, the calculated rate (R ) approaches the previous day’s rate based on standard (gap‐filled) methodology (r =R ). This mitigates concerns of volatility that may arise by simply extending the gap‐filling period. Page 18 In the case of need, with the notation above, derived formulas for contingency arrangements on consecutive days are as follows: Day 1 Contingency R
v r
v
v r̅
v
Day 2 Contingency R
v
v R
v
v
Day 3 Contingency v r̅
v
R
v
v
v
v R
v
v
Day 4 Contingency v r̅
v
… If either the daily aggregate transaction volume or the number of Panel Bank contributors does not increase above the established contingency thresholds after a number of TARGET days agreed upon by the Steering Committee18, the Tier 2 contingency methodology will be invoked. Tier 2: Quote‐based Calculation Methodology Quote‐based calculation arrangement based on inputs which will inform each Panel Bank’s quote. Guidelines governing these inputs will be developed by EMMI and documented in the revised Code of Conduct and Code of Obligations of Panel Banks. This calculation methodology will continue until the transaction volume and/or number of Panel Bank contributors increases to an appropriate level. 3.5 TransactionCollection,CalculationandPublicationTime
Panel Banks will be requested to submit, for each tenor, their daily volume‐weighted average rate and aggregated volume19 (or a no transaction flag) to the EMMI Calculation Agent via a submission protocol to be determined. For each tenor, Panel Banks will be expected to include all eligible20 transactions carried out during business day T for the calculation of Euribor on TARGET day T+1 (the first TARGET day after the trade date). Panel Banks will be asked to submit their contributions between 18:00 CET on day T and 10:00 CET on day T+1.21 18
Reviewed continuously and under live conditions. As described in section 3.3.2. 20
In the sense of section 3.3.1. 21
EMMI will instruct Panel Banks to follow the (technical) instructions set in place for the ECB’s Money Market Statistical Reporting (MMSR) Program. In particular, Panel Banks reporting to the MMSR should be able to contribute toward the calculation of Euribor without additional effort. Departures from these instructions (e.g. the contribution window for Euribor is longer than the MMSR’s) will be made clear. 19
Page 19 After the calculation has been processed at 11:00 CET, the Calculation Agent will publish the Euribor reference rate for each tenor, making it available to all subscribers and other data vendors. Contribution window (18:00 – 10:00)
TRADE DAY (TARGET T)
Calculation
11:00 Figure 5. Timeline of a Panel Bank’s transaction collection and submission activities PUBLICATION DAY (TARGET T+1)
Transaction‐based Euribor will continue to be published with a three decimal places precision. 3.6 PublicationofSubmissions
Currently, the submissions by individual Panel Banks are published daily with the Euribor fixings. This publication takes place to offer transparency to benchmark users with respect to the inputs to the Euribor fixings, consistent with IOSCO Principles 6 and 9. Under the new determination methodology, Panel Bank submissions will reflect actual borrowing rates and transaction volumes. As these data are commercially sensitive, their immediate and detailed publication may be inappropriate. Taking regulatory and benchmark user needs into account, EMMI will work with Panel Banks to establish a revised publication protocol, continuing to offer transparency to stakeholders, while protecting the confidential nature of the Panel Bank submissions. Page 20 4 Transition
4.1 SeamlessTransitionPath
The FSB report outlines a number of potential transition paths for either the evolution of an existing benchmark or the replacement of an existing benchmark by a new benchmark, see [MPG14, pages 13f].22 Under the least complex of these, termed the “Seamless Transition”, the existing benchmark is retained. In this case, modifications are limited to administrative arrangements or to the determination methodology. In particular, the Underlying Interest that the benchmark seeks to measure remains the same (ibid.): “With a Seamless Transition, a particular IBOR+, would become the fixing method for the corresponding IBOR. The new methodology would be used, but the legacy name of the reference rate would remain unchanged and the rate would continue to be published on the pages on which it is currently found. Contracts would not need to be changed. This evolutionary change in IBOR is the least disruptive transition path, and is less subject to legal challenge and significant changes in the market valuation of contracts to the extent that the IBOR+ is close to the legacy IBOR fixing in value, definition, or volatility.” The FSB report notes that the legal and operational risks increase progressively as more complex transitions are contemplated. Consequently, where there is the possibility of more than one transition type, the Seamless Transition would generally be preferred (see [MPG14, pages 14, 51, 54]). In progressing the Euribor+ Project, EMMI has therefore aimed to pursue a Seamless Transition, based on the view that such a transition path would be in the interest of the broad majority of Euribor stakeholders. The Seamless Transition poses the least legal and operational risks, since the Underlying Interest of the benchmark remains unchanged. In turn, this underpins arguments in favor of the continuity of contracts referencing the benchmark. In concrete terms, the benchmark will therefore continue to be termed “Euribor” and the benchmark rates will continue to be published on the data vendor pages as currently. As indicated in the above quote, the FSB report considers a Seamless Transition possible if definition as well as value and volatility of Euribor under the current and transaction‐based determination methodologies are sufficiently similar. The degree of similarity constitutes a key criterion to assess whether the terms of financial contracts referencing Euribor continue to function ([MPG14, page 58]): “A critical question is whether IBOR+ could be considered, from a legal perspective, to be simply a methodological change to IBOR, or if instead it should be considered a distinct index. If the legal risk proves acceptable, then a seamless/successor rate transition to IBOR+ should be adopted. This would involve a cut over in methodology on a designated date, following a notice period. Ideally, the IBOR name would be retained post transition. We would expect all contractual references to IBOR to use the revised fixings from the date of transition. In order 22
The Report refers to four different types of transitions. While under the “Seamless Transition” the benchmark is retained by merely adapting the underlying methodology, the other transition paths imply the launch of a new benchmark which then replaces the legacy IBOR. Page 21 to reduce the risk of legal challenge, we recommend adopting an IBOR+ that performs well in back tests against IBOR, both in terms of average level and volatility.” Accordingly, EMMI, in the process of developing the transaction‐based determination methodology, has emphasized the need to achieve similarity in the essential characteristics of the benchmark as this determination methodology is introduced. Specifically: 


As described in Section 2 above, the Underlying Interest of Euribor remains unchanged. The arrangements for the publication of Euribor, including the publication time and publication pages will continue as currently. The rate and volatility levels of Euribor calculated under the current and new determination methodology will be closely monitored in the period prior to implementation to ensure that differences remain comparable to the levels presented in section 4.3 below. 4.2 RateandVolatilityCharacteristicsunderCurrentandNewDetermination
Methodologies
With the introduction of the new determination methodology, it is inevitable that there will be some changes in the level and volatility characteristics of Euribor. No economic variable can be measured with absolute precision, so any change of measurement method will produce some variation. There will be an impact – particularly in volatility – by moving from a quote‐based to a transaction‐based approach. Therefore, a key design principle for the development of the transaction‐based determination methodology was to minimize such changes in the characteristics of the benchmark, to the extent possible. EMMI presents below a preliminary assessment of the impacts on rate level and volatility in moving to the new determination methodology. It must be stressed that this assessment is not a prediction of the actual changes when the new determination methodology is introduced in 2016. The data for this analysis were collected in 2012 and 2013, as part of the design phase of the Euribor+ Project, and may not be reflective of current market conditions, or indeed as they will pertain in 2016 when the new methodology is launched. In addition, it should be noted that these transaction data were gathered from a specific set of banks; this set will inevitably differ to some degree in size and composition to the Euribor panel that will be in place in 2016 on the launch of the new determination methodology. However, EMMI believes that it is nonetheless worthwhile to indicate the potential magnitudes of the changes in rate and volatility levels that may be introduced by changing to the new methodology for calculating Euribor. This will allow market participants and users of the Euribor benchmark to prepare within their business activities for the introduction of the new methodology. In addition, prior to the planned launch of the transaction‐based methodology in July 2016, EMMI will conduct a “pre‐live impact verification” exercise. During this period, EMMI will estimate the rate level and volatility impacts under the then‐current market conditions and will assess whether such impacts remain comparable with the estimated levels described in this paper. Based on this analysis, the EMMI General Assembly, on the recommendation of the Euribor Steering Committee and after consultation with the relevant public authorities, will make a determination on proceeding to the launch of the new methodology. Page 22 Assessment of Impact on Rate Level and Volatility from 2012‐13 Data To obtain an indicative quantification of the impacts on rate level and volatility arising from the changes in methodology, EMMI, with the support of the ECB and the Euribor+ Taskforce, performed a comparison of Euribor calculated under the current and new determination methodologies. This was based on the data collected during 2012 and 2013. A range of further detailed analyses were undertaken in order to assess the contributions of individual factors to the overall impacts. The differences in rate levels and volatilities are summarized below23: Table 6. Rate Spread Table 7. Volatility24 Difference Based on its analysis, EMMI believes that the primary factors driving the core rate spread are as follows: 

The transaction‐based methodology reflects explicitly a borrowing basis for the eligible transactions. The current Euribor specification has been less clear on this point, and as a result, there is a mixed reliance on borrowing and lending rates in the determination of Euribor25. Explicitly and exclusively relying on the borrowing side appears to account for the larger portion of the spread movement across the tenors. However, to put the observed spreads into context, it should be noted that they are approximately one half of the observed average borrowing to lending spreads derived from the data. Panel composition effects, accounting for typically a 1‐4 basis points (BPs) variation in spread, depending on tenor. 23
Observed Period: 9 Jan 2012 – 28 Feb 2013 (1 Week Tenor); 9 Jan 2012 – 30 Aug 2013 (All other tenors) Volatility is measured as the standard deviation of the series of daily rate changes over the observed period. 25
While the current Euribor Code of Conduct provides guidelines on the hierarchy of data inputs, it does not establish a fixed contribution model provided that the contribution process decided by the Panel Banks can be justified, replicated and documented. Therefore, while in line with the principles established in the Euribor Code of Conduct, a variety of methodological approaches may validly exist. 24
Page 23 
The expansion of borrowing sources from interbank to wholesale accounts for a 0‐3 BPs variation in spread for the shorter tenors, with the transaction‐based Euribor calculated rate being higher by this amount when all wholesale sources are included. The transaction‐based methodology results in an expected increase in volatility resulting from the use of actual transactions as anticipated in the MPG report (see [MPG14, page 26]). Based on the analysis undertaken by EMMI, many of the methodological aspects described in Section 3, however, serve to constrain the volatility resulting from the transaction‐based methodology within acceptable boundaries. The technical calculation methodology changes – going from trimmed mean to median group – are not considered to have any material impact on the rate level, but do reduce the volatility of the transaction‐based Euribor rate. 4.3 TransitionPlan
As indicated earlier, EMMI targets 4 July 2016 for the switch from the current to the transaction‐based determination methodology. The transition plan is organized across five inter‐connected work streams: Workstream Objectives

Benchmark Framework 
Elaborate the Euribor specification in order to facilitate a Seamless Transition Develop the revised Euribor Code of Conduct to reflect the new Determination Method Transaction‐based Methodology 
Finalize the transaction‐based determination methodology 
Develop the specification of the infrastructure and the daily operations, including the data collection methodology and revised policy and procedural documentation 
Implement the revised methodology and the new Administrator and Calculation Agent infrastructure 
Provide transparency to stakeholders on all aspects of the transition in order to allow stakeholders to adopt arrangements to mitigate potential migration issues. Infrastructure Transition Execution Communication Program Page 24 Figure 8. EMMI’s high‐level roadmap for the remaining portion of the transition period Key milestones in respect of the transition are summarized below: Q4 2015 Publication of the consultative position paper on the Evolution of Euribor. Q4 2015 Transaction‐based Euribor workshops. Q1 2016 Revision of the Euribor Code of Conduct to include the transaction‐based determination methodology. Q1‐Q2 2016 Infrastructure Development on the side of the Calculation Agent systems and the Panel Banks Q2 2016 Pre‐live impact verification to assess whether rates and volatility calculated with 2016 data are comparable to the estimates published in Q4 2015. Q1‐Q3 2016 EMMI will provide regular project updates and conduct, where required, follow‐up workshops 4 July 2016 Switch of the underlying determination methodology to the transaction‐based determination methodology. Page 25 4.4 StakeholderOutreachduringTransition
As noted above, EMMI is conducting an extensive Communications Program to support the transition. As the administrator of Euribor, EMMI is committed to provide transparency and conduct due diligence. In this context, EMMI believes that undertaking a broad outreach and offering a high degree of transparency to stakeholders will allow them to get sufficiently familiar with the behavior and characteristics of a Euribor based on transactions and devise, where required, arrangements or practices to mitigate potential migration issues. In particular, EMMI believes that by offering a full description of the transaction‐based determination methodology, transition considerations, and results of the preliminary impact analysis, stakeholders will be enabled to assess the potential migration issues raised by the planned changes. The market outreach consists of three elements: 


This consultation paper provides a complete account of the envisaged benchmark specification, including indicative estimates of the magnitude of the impact on Euribor rates and volatility from the change to the transaction‐based determination methodology. EMMI will hold a number of workshops across key Euribor constituencies to solicit further feedback from stakeholders. Throughout the period until implementation, EMMI will provide regular public project updates and conduct, where required, follow‐up workshops. Page 26 5 Consultation
5.1 ConsultativeQuestions
EMMI would like to obtain the opinion of Euribor stakeholders and interested parties on the following issues concerning the transaction‐based Methodology and the Transition Plan. Name of respondent: Position: Organisation: Email: Contact telephone: Anonymity required (Yes/No) 1) Continued publication of potentially discontinued tenors, based on an interpolation approach For the reasons mentioned in Section 3.2, EMMI is planning to discontinue the 2‐week, 2‐month, and 9‐
month tenors. EMMI has been asked to consider the possibility of publishing interpolated rates for these three tenors. Question: Do you think that EMMI should publish rates for the 2‐week, 2‐month, and 9‐month tenors, based on an interpolation method? Please provide your rationale. Please, give examples and details about the products that will benefit
from the publication of these interpolated rates. 2) Inclusion or exclusion of non‐financial corporates in borrowing sources There are variations in national funding practices across the EU, with non‐financial corporations (see page 19, ESA 2010 classification: S11) being a more significant source of wholesale bank funding in some jurisdictions relative to others. Because of this importance, EMMI has chosen to include non‐
financial corporates as an eligible counterparty in the current methodology and analysis presented in this paper. Question: Do you agree with EMMI’s decision on the inclusion of these transactions in the calculation of Panel Banks’ submissions? If not, on what basis would you seek to exclude non‐financial corporates as eligible borrowing sources for Panel Banks in the determination of the benchmark? Please provide your rationale. Page 27 3) Publication Time It is planned to maintain the existing 11 AM CET publication time for Euribor to preserve continuity with the current arrangements. Question: Would you prefer that a different publication time, potentially earlier in the day, be established? Please provide your rationale. 4) Determination methodology Question: Are there any aspects of the transaction‐based determination methodology for which you would like clarification by EMMI? If yes, please elaborate. 5) Product Modifications Question: For institutions developing products referencing Euribor or users of such products, what modifications, if any, do you anticipate will be required to those products as a result of the introduction of the new transaction‐based determination methodology? For example, would you expect the need for modifications to accommodate the anticipated higher volatility of the rate? 6) Transition Question: EMMI as the administrator of the Euribor benchmark will continue to pursue a Seamless Transition with the highest degree of transparency and due diligence. Do you see or anticipate any other area not included in this paper that should be addressed by EMMI? Should you have any recommendations, please provide your feedback. 7) Timeline Question: EMMI recommends that Euribor stakeholders prepare for the change in the determination methodology on 4 July 2016. Is this sufficient time to prepare? What would prevent you from meeting this timeline? 8) Communication Question: What further information or outreach could EMMI undertake to assist you in planning for the launch of the new determination methodology in July 2016? Page 28 5.2 RespondingtothisConsultation
EMMI invites all interested parties to respond to this consultative paper. In particular, EMMI would like to invite the following stakeholders to provide their feedback by Friday 29 January 2016: 



Subscribers to EMMI benchmarks Representative trade associations and user associations Euribor Panel Banks Regulatory Authorities (including Central Banks) Please send your feedback By e‐mail to: info@emmi‐benchmarks.eu, specifying “Euribor Consultation” on the Subject of the email or By post to: European Money Markets Institute (EMMI) Avenue des Arts 56 1000 Brussels Belgium Following the EMMI Benchmarks Consultation Policy 26 , EMMI shall address feedback received from stakeholders in a published summary of contributions, anonymized and aggregated when stakeholders have requested anonymity. EMMI will provide its rationale for the acceptance, modification or rejection of recommendations made by respondents to the consultation as part of this summary. EMMI will publish a summary of the consultation feedback on the EMMI website. Such publication shall take place as soon as practical after the approval of the summary by the Euribor Steering Committee and the EMMI Board of Directors. 26
EMMI Benchmarks Consultation Policy: http://www.emmi‐benchmarks.eu/assets/files/D0365C‐2014‐EMMI%20Consultation%20Policy‐procedures.pdf Page 29 AnnexI:EuriborCalculationExample
In this example, Euribor is calculated for the 3‐month tenor using the transaction‐based methodology described in Section 3.4. For the purposes of this example, let us assume that the Euribor Panel is comprised of 36 banks. The last column of the table below summarizes the data submitted to the EMMI Calculation Agent for the publication of the benchmark in the morning of day T+1. We observe that on day T, 11 out of the 36 banks in the Euribor Panel submitted a no‐transactions indicator (light blue cells). Once this information is submitted to the Calculation Agent, the transaction‐based Euribor methodology looks back at the data submitted by each of these banks in search for the most recent contribution within the last 4 TARGET days. The information is summarized in the following table. (Cells that are not used throughout this example are shaded in gray.) DAY
Rate (%)
Bank 1
Bank 2
Bank 3
Bank 4
Bank 5
Bank 6
Bank 7
Bank 8
Bank 9
Bank 10
Bank 11
Bank 12
Bank 13
Bank 14
Bank 15
Bank 16
Bank 17
Bank 18
Bank 19
Bank 20
Bank 21
Bank 22
Bank 23
Bank 24
Bank 25
Bank 26
Bank 27
Bank 28
Bank 29
Bank 30
Bank 31
Bank 32
Bank 33
Bank 34
Bank 35
Bank 36
0.214
T‐4
Volume (mio)
Rate (%)
T‐3
Volume (mio)
Rate (%)
0.216
T‐2
Volume (mio)
11.500
Rate (%)
Rate (%)
T
Volume (mio)
0.216
0.216
0.215
0.216
35.600
23.900
23.200
20.400
0.214
0.212
0.210
18.400
17.300
15.350
0.209
0.210
14.980
12.000
0.209
0.208
15.600
22.300
0.203
0.204
0.205
0.204
18.300
17.430
16.320
15.420
0.204
0.208
0.205
0.203
16.200
14.750
15.500
11.980
0.202
0.201
0.202
37.500
40.400
23.400
0.202
0.203
0.203
34.200
17.500
18.500
31.000
0.199
22.000
0.208
21.200
0.204
0.208
0.201
T‐1
Volume (mio)
32.200
23.450
21.340
0.204
12.250
0.203
25.400
Aggregated Volume (mio)
Raw
Gap‐filled
516.430
693.320
Page 30 The gap‐filling technique retrieves the submission information from up to 4 previous days for the banks that had no transaction volume to submit for day T. This causes the number of banks contributing toward the calculation in respect of day T to increase from 25 to 34. There are still 2 banks (namely, Bank 30 and Bank 34) that did not report any transactions within the given cut‐off date. Bank 30 and Bank 34 are therefore excluded from the calculation of the index for the day. We proceed now to the calculation of the index. For that, we order all submission rates associated to non‐zero transaction volumes (after gap‐filling) from lowest to highest. As the number of contributing banks is even, the median group is integrated by the 4 central rates in this ordered list. The transaction‐based Euribor is then determined as the simple average of the elements in the median group: 0.204
0.205
0.205
4
0.208
.
… 0.204 0.204 0.204 0.205 0.205 0.208 0.208 0.208 … Page 31 AnnexII:ESA2010CounterpartyClassification
The counterparty classification in Section 3.3.1 is based on the definitions of institutional sectors and subsectors described by the European System of Accounts (ESA 2010) developed by the European Union’s Eurostat group.27 The eligible transaction counterparty classification groups map directly to certain ESA 2010 institutional sectors and sub‐sectors. ESA 2010 classification system is also used by the European Central Bank (ECB) in its data specification and reporting requirements outlined in the Money Market Statistical Reporting (MMSR)28 framework and instructions. The mapping of the ESA 2010 institutional sector designations to the Euribor eligible transaction counterparty classifications is as follows29: Euribor Eligible Transaction Counterparty Classification ESA 2010 Designation Deposit‐Taking Corporations except the Central Bank subsector S.122 S.123 Other Financial Institutions S.125 ESA 2010 Institutional Sector/ Sub‐Sector ESA 2010 Definition of Institutional Sector/Sub‐
Sector The Deposit‐Taking Corporations except the Central Bank subsector (S.122) includes all financial corporations and quasi‐corporations, except those classified in the central bank and in Deposit‐Taking the Money Market Funds subsectors, which are Corporations except principally engaged in financial intermediation and whose business is to receive deposits and/or the Central Bank close substitutes for deposits from institutional units, hence not only from Monetary Financial Institutions, and, for their own account, to grant loans and/or to make investments in securities. The Money Markets Funds subsector (S.123) consists of all financial corporations and quasi‐
corporations, except those classified in the central bank and in the credit institutions subsectors, which are principally engaged in financial Money Market Funds intermediation. Their business is to issue investment fund shares or units as close substitutes for deposits from institutional units, and, for their own account, to make investments primarily in money market fund shares/ units, short‐term debt securities, and/or deposits. Other Financial The other financial intermediaries, except Intermediaries, except insurance corporations and pension funds Insurance subsector (S.125) consists of all financial Corporations and corporations and quasi‐corporations which are Pension Funds principally engaged in financial intermediation by 27
http://ec.europa.eu/eurostat/documents/3859598/5925693/KS‐02‐13‐269‐EN.PDF Regulation (EU) No 1333/2014 of the ECB of 26 November 2014. 29
Whenever the counterpart of the contributor lies outside the EU, the best possible approximation of the sector classification can be applied. 28
Page 32 Euribor Eligible Transaction Counterparty Classification ESA 2010 Designation ESA 2010 Institutional Sector/ Sub‐Sector S.121 Central Bank S.13 General Government S.2 Rest of the World Non‐financial Corporations S.11 Insurance Corporations S.128 Insurance Corporations Pension Funds S.129 Pension Funds Official Sector Institutions ESA 2010 Definition of Institutional Sector/Sub‐
Sector incurring liabilities in forms other than currency, deposits, or investment fund shares, or in relation to insurance, pension and standardized guarantee schemes from institutional units. The Central Bank subsector (S.121) consists of all financial corporations and quasi‐corporations whose principal function is to issue currency, to maintain the internal and external value of the currency and to hold all or part of the international reserves of the country. The general government sector (S.13) consists of institutional units which are non‐market producers whose output is intended for individual and collective consumption, and are financed by compulsory payments made by units belonging to other sectors, and institutional units principally engaged in the redistribution of national income and wealth. The rest of the world sector (S.2) is a grouping of units without any characteristic functions and resources; it consists of non‐resident units insofar as they are engaged in transactions with resident institutional units, or have other economic links with resident units. Its accounts provide an overall view of the economic relationships linking the national economy with the rest of the world. The institutions of the EU and international organizations are included. The non‐financial corporations sector (S.11) consists of institutional units which are independent legal entities and market producers, and whose principal activity is the production of goods and non‐financial services. The insurance corporations subsector (S.128) consists of all financial corporations and quasi‐
corporations which are principally engaged in financial intermediation as a consequence of the pooling of risks mainly in the form of direct insurance or reinsurance. The pension funds subsector (S.129) consists of all financial corporations and quasi‐corporations which are principally engaged in financial intermediation as the consequence of the pooling Page 33 Euribor Eligible Transaction Counterparty Classification ESA 2010 Designation ESA 2010 Institutional Sector/ Sub‐Sector ESA 2010 Definition of Institutional Sector/Sub‐
Sector of social risks and needs of the insured persons (social insurance). Pension funds as social insurance schemes provide income in retirement, and often benefits for death and disability. The European System of Accounts provides additional guidance and examples for each of the institutional sectors and sub‐sectors referenced in the table above. Page 34 AnnexIII:SupportingCharts
In this Annex, EMMI provides some further details around the analysis undertook during the development of the transaction‐based Euribor. The charts in this section intend to shed some light on the methodology and the choice of certain parameters for the calculation. We make the reader aware that not all details are provided. Gap‐fillingMethodology
As mentioned in Section 3, the use of real transactional data in the benchmark determination requires the development of a methodology able to reduce volatility effects while remaining anchored in transactions. Charts 1 through 4 below give empirical evidence of the significant improvement that the gap‐filling methodology represents when it comes to reaching acceptable daily transaction volume levels and a representable number of daily contributors.30 In these charts, “Raw” should be understood as a run obtained without the use of the gap‐filling methodology – relying only on daily transactions from the Panel Banks. As mentioned previously, the core transaction‐based Euribor methodology makes a distinction between the 1‐
week, 1‐, 3‐, and 6‐month tenors and the 12‐month tenor with regard to the number of previous days we are allowed to consider: for the first four tenors, we can use data from up to 4 previous days, and for the longer tenor, we can rely on data from up to 6 previous days. Chart 1. Number of contributors, raw vs. gap‐filling, 1‐month 30
Recall that for the purposes of the calculation, only Panel Banks with non‐zero transactional volume on day T are effective “contributors” toward the calculation of the Euribor benchmark on day T+1 (see section 3.4). Page 35 In Charts 2 b) and 4 b), we provide a comparison of the 4‐day versus the 6‐day gap filling data for the 12‐month tenor. Chart 2. Number of contributors, raw vs. gap‐filling a) 3‐month b) 12‐month Chart 3. Comparison of transaction volume, raw vs. gap‐filling , 1‐month Transac on Volume (GF4)
Transac on Volume Raw
8000
7000
6000
Euro, mio
5000
4000
3000
2000
1000
13
Au
g
13
Jul
13
J un
3
Ma
y1
3
r1
Ap
13
Ma
r
13
F eb
13
Jan
12
De
c
Oc
t
No
v1
2
12
12
S ep
12
Au
g
12
Jul
12
J un
Ma
y1
2
2
r1
Ap
12
Ma
r
12
F eb
Jan
12
0
Page 36 Chart 4. Comparison of transaction volume, raw vs. gap‐filling a) 3‐month b) 12‐month Quote‐basedEuriborvs.Transaction‐basedEuribor
Charts 5 and 6 below represent current (quote‐based) Euribor versus transaction‐based Euribor over the period January 2012 – August 2013. We can see how both data series follow the same trend, being reactive, for example, to changes in the market (e.g. the European Central Bank policy rates31). Chart 5. Current Euribor vs. Transaction‐based Euribor, 1‐month 31
The rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem, is plotted on Chart 5. Page 37 Chart 6. Current Euribor vs. Transaction‐based Euribor 3‐month 12‐month Chart 7. Transaction‐based Euribor (1‐ and 3‐month), EONIA Page 38 CalculationMethodologiesandManagingVolatility
The following charts show data runs for indices calculated using different calculation methodologies. As mentioned in Section 3.4.2, the effect of gap‐filling as a volatility mitigant is clear when looking at the time series. Chart 8. Comparison of Calculation Methodologies, 1‐month Chart 9. Comparison of Calculation Methodologies 3‐month 6‐month Page 39 AnnexIV:GlossaryofTerms
In this annex we provide definitions to some of the terms that are recurrent in the text. When applicable, we include our source. Description 2012‐2013 Data Data collection performed by EMMI in collaboration with the European Central Bank to assess the viability of a determination methodology for Euribor anchored in real transactions. Basel III and the LCR Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision, and risk management of the banking sector. Some of the objectives of these measures are to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, and to strengthen banks’ transparency. The Liquidity Coverage Ratio (LCR) is one of the Basel Committee's reforms to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. The LCR promotes the short‐term resilience of a bank's liquidity risk profile.
The Benchmark in scope of this paper is a rate:  Calculated periodically, entirely or partially by the application of a formula or another method of calculation to, or an assessment of, the value of one or more Underlying Interests;  Used as a reference for purposes that include:  The determination of the interest payable, or other sums due, under loan Financial Benchmark* agreements or under other financial contracts or instruments;  The determination of the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument; and/or  The measure of the performance of a financial instrument. Euribor is a Financial Benchmark.
Benchmark Administration* The administration of a benchmark includes all stages and processes involved in the production and dissemination of the benchmark, as well as  The collection, analysis, and/or process of information or expressions of opinion for the determination of the benchmark;  The determination of the benchmark through the application of a formula or another method; and  The dissemination to users, including any review, adjustment, and modification to this process. Benchmark Administrator* A benchmark administrator is an organization or legal person that controls the creation and operation of the Benchmark Administration process, whether or not it owns the intellectual property relating to the Benchmark. In particular, it has responsibility for all stages of the Benchmark Administration process, including:  The calculation of the Benchmark;  The determination and application of the Benchmark Methodology; and  The dissemination of the Benchmark. The European Money Markets Institute (EMMI) is Euribor’s Administrator. Page 40 Description Euribor Steering Committee The Euribor Steering Committee is the oversight body responsible for monitoring all aspects of the methodology and control framework as required by the Euribor Code of Conduct. Financial Stability Board The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. The FSB aims to strengthen financial systems and increase the stability of international financial markets. The policies developed in the pursuit of this agenda are implemented by jurisdictions and national authorities. Gap‐filling The core calculation methodology of the transaction‐based Euribor is designed to ensure daily data sufficiency while remaining anchored in real transactions. The gap‐filling technique is used in cases in which a particular Panel Bank has no transactions to report for a given day and tenor. This technique uses the most recent volume‐weighted average rate within a given number of days. IBORs+ The term “IBOR+” was casted by the Market Participants Group in their 2014 Report as a way to refer to existing IBOR rates strengthened by underpinning them to the greatest extent possible with transactions.
Interpolation and Extrapolation Interpolation and extrapolation are mathematical methods of approximating values at positions in between data points, or beyond the range of data. In the money market, prices are generally quoted for standard periods, such as 1 week, 1 month, etc. If there were a need to quote a price for a date between these periods, one would need to interpolate. If the date required is just before or just after the known periods, rather than between them, one would use extrapolation techniques.
IOSCO Principles* The International Organization of Securities Commissions (IOSCO) is recognized as the global standard setter for the securities sector. IOSCO develops, implements, and promotes adherence to internationally recognized standards for securities regulation. The IOSCO Principles are intended to promote the reliability of Benchmark determinations, and address Benchmark governance, quality and accountability mechanisms. The Principles provide a framework of standards that Administrators should implement according to the specificities of each Benchmark.
Market Participants Group The Market Participants Group was formed by the Official Sector Steering Group of the Financial Stability Board. The MPG was tasked with examining the feasibility and viability of adopting additional reference rates and analyzing potential issues arising from the transition from quote‐based rates to rates anchored in transactions. Money Market Statistical Reporting For the purposes of the regular production of money market statistics, entities subject to the European Central Bank’s statistical reporting requirements report to the National Central Bank of the Member State where they are resident on a consolidated basis, including for all their Union and EFTA located branches, daily statistical information relating to money market instruments. The main purpose of the collection of such statistics is to provide the ECB with comprehensive, detailed and harmonized statistical information on the money markets in the euro area. The data derived from the transactions collected in respect of various market segments provide information on the transmission mechanism of monetary policy decisions. EMMI will leverage technical and logistical aspects of the MMSR program in order to harmonize and facilitate the contribution of Panel Banks toward the calculation of the Euribor Page 41 Description benchmark (e.g. use of ESA 2010 counterparty codes, code list names, etc.) See Regulation (EU) No 1333/2014 of 26 November 2014.32 Seamless Transition It is the first of the four paths presented in the March 2014 MPG report for the transition to transaction‐based benchmarks. Together with the Successor rate transition below, they are paths not implying a replacement of the current benchmark. With a Seamless Transition, a new transaction‐based methodology would be used in the determination of the benchmark, but the legacy name of the reference rate would remain unchanged and the rate would continue to be published on the pages on which it is currently found. Contracts would not need to be changed. This evolutionary change is the least disruptive transition path, and is less subject to legal challenge and significant changes in the market valuation of contracts. Successor Rate Transition It is the second transition path envisaged by the MPG in their report.
If a particular transaction‐based IBOR differs somewhat in definition, value, or volatility from its corresponding IBOR, a successor‐rate transition may nevertheless be possible in some jurisdictions. After a minimum of a two‐
year lead‐in period, the legacy IBOR would cease to exist and publication of the successor rate would commence on the following day, effectively converting all contracts to the new reference rate. An effective successor‐
rate transition would require careful advance legal groundwork, strong industry and regulatory support, and in some settings such as the Eurozone, supporting legislation. Even if successful in a legal sense, this form of transition may cause non‐trivial changes in the market values of contracts, and thus important accounting and tax effects. Market‐Led Transition It is the third transition path envisaged by the MPG in their report.
Under this transition path, legacy IBOR may need to continue for a period at least long enough that outstanding residual contracts have run off to a level where a final discontinuation of IBOR is deemed not to represent a systemic risk. Submitting banks are likely to object due to the burden of providing legacy IBOR submissions and the ongoing potential legal liability. Parallel with Cut‐Over Transition It is the last of the transition paths envisaged by the Market Participants Group in their report is a “parallel‐with‐cutover” approach, under which a final discontinuation date for an affected legacy IBOR would be set. Alternative reference rates would become available during a multi‐year phase‐in period. Market participants, aware of the impending discontinuation date, would be encouraged to replace their existing contracts with new contracts referencing one of the alternative benchmarks. Transition Paths† 32
https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2014_359_r_0006_en_txt.pdf Page 42 Description TARGET2 TARGET2 is the real‐time gross settlement system owned and operated by the Eurosystem. TARGET stands for Trans‐European Automated Real‐time Gross settlement Express Transfer system. The TARGET system is closed on Saturdays and Sundays, as well as on New Year’s Day, Good Friday, Easter Monday, Labor Day, Christmas Day, etc. An updated list, by year, is available on the ECB’s website. Days in which TARGET is closed are not settlement days for the euro money market or for foreign exchange transactions involving the euro. Euribor Tenors The maturities for which the Euribor rates are calculated and published. Current Euribor is calculated and published for the following 8 maturities: 1 and 2 weeks and 1, 2, 3, 6, 9 and 12 months. Transaction‐based Euribor will be calculated and published for the following 5 maturities: 1 week, 1, 3, 6, and 12 months. Volatility The extent to which an interest rate changes over time. High volatility implies rapid and large variation of the rate over a relatively short period of time; low volatility implies much smaller and less frequent changes in value. (This definition is not restricted to interest rates, extending to prices of securities, level of markets…)
* [IOSCO13] † [MPG14] Page 43 AnnexV:FrequentlyAskedQuestions
1. What is the use of Euribor? Euribor is a major euro interest reference rate, widely used in the global financial system as benchmark for a large volume and broad range of financial products and contracts. Euribor is of systemic importance for financial stability. Euribor is used notably as an index for Over‐The‐Counter (OTC) contracts and exchange trade derivatives, corporate loans, retail mortgages, floating rate bonds and securitized products. 2. Will a transaction‐based Euribor be a new benchmark? No. The Euribor benchmark is evolving to become more transparent and robust in line with market, regulatory and consumer expectations. What this means in practice is that Euribor is evolving from a quote‐based to a transaction‐based benchmark. Whilst this evolution will require a change in the benchmark determination methodology, the Euribor benchmark stays the same – as it will continue to measure the same Underlying Interest (i.e. the rates at which banks of sound financial standing could borrow funds in the EU and EFTA in the wholesale, unsecured short term money markets in euro). 3. Will Euribor change its name? No. EMMI proposes to undertake an evolutionary approach. While the determination methodology will evolve to reflect the changes in bank funding in the recent years, it will continue to measure the same underlying interest and will therefore keep its name. 4. Does this evolution of the Euribor benchmark take into account the upcoming regulatory changes at EU level? Indeed, to comply with regulatory guidance, financial benchmarks, including Euribor, should be anchored in actual transactions to the extent possible in order to improve transparency and reduce any risks of manipulation. The proposed evolutionary approach is in‐line with IOSCO, ESMA and FSB reform recommendations and will result in a more robust Euribor benchmark. 5. When do you intend to change the determination methodology? EMMI believes that a switch‐over on 4 July 2016 gives market participants sufficient time to prepare. This is further addressed with Question No. 6 in section 5. 6. If the new methodology will be based on transactions, will this result in higher volatility that can potentially affect end users? As referred to in the FSB Report, “greater volatility may occur in more transactions‐based reference rates”. While we acknowledge that a transaction‐based benchmark could entail an increased volatility, this would be fully representative of the market reality. In addition, as part of the transaction‐based methodology devised in Page 44 the Euribor+ Project, EMMI has developed arrangements to mitigate the effects of volatility. Furthermore, we can expect the marketplace to adjust to a more volatile rate, e.g. through changes in product design for those products referencing the Euribor index. EMMI’s goal is to have a benchmark that is more transparent and robust in line with market, regulatory and consumer expectations. To this end, will continue to raise market preparedness to ensure a smooth Euribor transition for all market participants. 7. At what time will the transaction based Euribor be fixed, calculated and published? Panel Banks will be asked to submit their contributions until 10:00 CET on the day of the benchmark determination. After the calculation has been processed at 11:00 CET, it will be publicly available to subscribers and end‐users. The publication time of transaction‐based Euribor will remain the same, shortly after 11:00 CET. Page 45 References
[ESMA13] ESMA‐EBA Principles for Benchmark‐Setting Processes in the EU (Final Report), ESMA‐EBA, June 2013. http://www.esma.europa.eu/system/files/2013‐658_esma‐eba_principles_for_benchmark‐
setting_processes_in_the_eu_‐_final_report.pdf [EURCoC] Euribor Code of Conduct, EMMI, October 2015. http://www.emmi‐benchmarks.eu/assets/files/Code%20of%20conduct/D2712I‐2014‐
Euribor%20Code%20of%20Conduct%2001Oct2013%20‐
%20Revised%20in%201%20Oct2015_final.pdf [EUCom13] Proposal for a Regulation of the European Parliament and of the Council on indices used as benchmarks in financial instruments and financial contracts, September 2013. http://eur‐lex.europa.eu/legal‐content/EN/TXT/PDF/?uri=CELEX:52013PC0641&from=EN [FSB14] Reforming Major Insterest Rate Benchmarks, Financial Stability Board, July 2014. http://www.financialstabilityboard.org/wp‐content/uploads/r_140722.pdf [IOSCO13] Principles for Financial Benchmarks (Final Report), IOSCO, July 2013. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf [MPG14] Market Participants Group on Reforming Interest Rate Benchmarks, Financial Stability Board, March 2014. http://www.financialstabilityboard.org/wp‐content/uploads/r_140722b.pdf Page 46 European Money Markets Institute
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