Back in May we looked at the changes to the governance and use of LIBOR following the findings of the Wheatley Review. These were aimed at comprehensively reforming LIBOR, providing strict and detailed processes for verifying LIBOR submissions against transaction data and ensuring that market participants continue to play a significant role in its publication and oversight. The desire for such measures has been highlighted again in the press following the FCA’s imposition of its third highest ever fine against Rabobank for “serious, prolonged and widespread misconduct” relating to LIBOR manipulation.
In seeking to improve the reliability of LIBOR tenors, publication of rates for CHF, EUR, JPY, USD and GBP LIBOR for 2 weeks and for 4, 5, 7, 8, 9, 10 and 11 months was discontinued. Reducing the number of quoted rates strengthens reliance on periods that are more frequently used and provides rates for which a more reliable mean figure can be produced. Additionally, all rates were discontinued for lesser used currencies – Sterling repo, NZD, DKK, SEK, AUD and CAD.
EURIBOR, the benchmark giving an indication of the average rate at which prime banks lend unsecured funding in the EURO interbank market for a given period, is now facing similar reforms as part of the recommendations presented jointly by the European Banking Authority (EBA) and the European Securities Markets Authority (ESMA).
As of 1 November 2013, EURIBOR discontinued publication of the 3 week and 4, 5, 7, 8, 10 and 11 month rates. This change seeks to eliminate rates that are already proven to be less used and on which fewer financial instruments are priced. EBA-ESMA’s concerns follow closely in the footsteps of the Wheatley Review and seek to eliminate rates for tenors that are insufficiently used to ensure that a reliable rate is delivered. In its report on the administration and management of EURIBOR, EBA-ESMA explained that the reduction is aimed at “simplifying the submission process without creating major financial stability risks in the transition process“.
Code of Conduct
The European Banking Federation (EBF) has commented on the growing importance of EURIBOR in monetary policy decisions and European financial stability, being used as a reference in a wide range of financial instruments, including loans to SMEs and households. As part of the ongoing process of ensuring the integrity and credibility of EURIBOR, a new Code of Conduct was published by the EBF on 1 October 2013. Amongst other amendments, the Code clarifies that the EURIBOR Steering Committee shall act as an adjudicating and sanctioning panel, on the basis that “confidence in the integrity of EURIBOR as a benchmark needs to be underpinned by a credible set of sanctions for failure to comply with applicable regulations and/or with the provisions of the EURIBOR Code of Conduct“.
More to come
There is further promise of EURIBOR reform focussed on developing additional checks and back-testing analyses and considering the development of potential alternatives based on real-transactions.
As with LIBOR, the reduction in EURIBOR tenors, along with and the implementation of the Code of Conduct and the promise of further reform, gives reassurance against the concerns raised in the EBA-ESMA report from January this year and are indicative of the EURIBOR Steering Committee’s ongoing commitment to retaining EURIBOR as a key instrument to ensuring European financial stability and maintaining the integrity of the rating as a whole.
Link to EBF Code of Conduct: http://www.euribor-ebf.eu/assets/files/Euribor_code_conduct.pdf