How to prepare for LIBOR, EURIBOR and EONIA disappearance?
Find out through this video with Laurent Viellard and its transcript, why interbank interest rates such as LIBOR, EURIBOR and EONIA will disappear, how they will be replaced, when and how to prepare for them.
Laurent, could you tell us why interbank interest rates such as the Libor, Euribor and Eonia are going to disappear?
There are two reasons: firstly because, during the financial crisis in 2008, short-term rates, EURIBOR, LIBOR, EONIA, which, let’s remember, are calculated using estimates from a panel of European and London-based banks, were the subject of manipulations.
Secondly, these rates have proven to be less relevant because they are less used by banks between each other. The sustainability of these rates as benchmarks was therefore called into question, and the regulators have therefore decided that these rates should be gradually abandoned. They wanted and it wants to move from estimated rates to observed rates. At a European level, the European Commission has initiated a regulation on benchmark indices, BMR, European benchmark regulation incorporating this interest rate issue.
Great. What will they be replaced with?
Each central bank has already launched a thought process to replace their LIBOR, EURIBOR and EONIA rates. At a European level, EONIA would be replaced by ESTER, for all rates derived from LIBOR, each existing rate would have a version for each currency:
- SOFR for the dollar,
- TONAR for the yen,
- SARON for the Swiss franc
- SONIA for the pound sterling.
Contrary to estimated rates, each of these rates would be calculated retrospectively from a sample, from a broader scope of transactions enabling the actual situation to be better reflected and thus avoid possible manipulations.
What will the impacts of the disappearance of these rates be on asset management?
There will be various types of impacts. Firstly, legal and commercial, today each contract makes or can make reference to these rates that will disappear. But such reference to these rates means that renegotiations will be required with clients to define the chosen rate.
Operational, secondly: in IT systems there are databases created taking only a single benchmark rate into account. If a number of benchmark rates have to be added, the databases will need to be revised. The final impact is performance spreads: the difference between existing rates and the new rates will create valuation differences in portfolios.
How should one prepare for these future changes?
The key to preparing is anticipating. We saw before, in the previous question, the different types of changes and different impacts there could be. So the first impact at operational level, listing all the IT Systems that make reference to these rates is a way to begin and to prepare for these changes.
Similarly at legal level. There are a certain number of contracts that make reference; listing all of these contracts will show the extent of the work that needs to be undertaken.
Lastly, at valuation spread level, at performance spread level we can already launch simulations to assess the impacts in terms of valuation here again in portfolios.
And to finish, Laurent, could you tell us about the implementation schedule?
The European Benchmark regulation currently foresees the end of European rates such as EONIA from 1 January, 2020. European authorities are currently looking to push back the end of these EONIA and EURIBOR rates by two years. If confirmed, the scheduled end of EONIA would coincide with that of LIBOR, taking us to 1 January, 2022.