On 21 September 2020, Steven Maijoor, Chair at the European Securities and Markets Authority (“ESMA”), delivered a speech at City Week 2020 in London. He gave a summary of the most recent and upcoming steps with regard to the implementation of the Euro Short-Term Rate (“€STR”)—an unsecured, transaction-based overnight rate—as the new market standard interest rate for Euro-based borrowings.
Mr. Maijoor highlighted the first anniversary of the publication of €STR and the related change in the calculation of EONIA: since 2 October 2019 EONIA has been calculated as €STR plus a spread of 8.5 bp. He noted that the anchoring of EONIA’s value to €STR “allowed the transition to €STR to start in a fast-track mode and avoided the frustration of EONIA contracts.” Although the move towards €STR in the market was slowed by the global COVID-19 pandemic in the first half of 2020, since central counterparty clearing houses made the switch from using the EONIA discounting curve to the €STR discounting curve for their new contracts in late July 2020, the pace towards transitioning from EONIA to €STR seems to have picked up. This is in line with the insight Mayer Brown has on the market and the thought process of many market participants. Mr. Maijoor noted that enhanced use of €STR and “international consistency” should result from the publication—currently subject to consultation—of compounded €STR, which also would serve as a term rate (i.e., EURIBOR) alternative.
In this regard, Mr. Maijoor provided an update on the status of EURIBOR, for which compounded €STR is a serious contender as a fallback rate. By way of background, EURIBOR was reformed in 2019 to employ a “hybrid methodology” of rate quotation, which relies on a three-level waterfall that prioritises the use of real transaction data whenever available from a group of quoting banks that is larger than the LIBOR panel. In addition, the robustness of EURIBOR is reassessed annually, and currently is deemed to comply with the EU Benchmark Regulation (“BMR”). As a result of the 2019 reformation, the quotation and use of EURIBOR is not expected to cease as of 1 January 2022 (subject, of course, to ongoing robustness and BMR compliance).
Mr. Maijoor noted in particular during his remarks that EURIBOR reacted appropriately and smoothly to the difficulties in the market originated by COVID-19, and attributed this to the reformed hybrid quotation methodology. As a critical benchmark, EURIBOR will be moved from supervision by the Belgian Financial Services and Markets Authority to supervision by ESMA in January 2022. Despite the absence of current plans to discontinue EURIBOR, the need to implement suitable fallbacks cannot be overemphasized. In this regard, the working group on Euro RFRs expects to finalize key fallback recommendations in the near future, and Mr Maijoor noted that trade associations are working on related protocols.
As he concluded his remarks, Mr. Maijoor reiterated that LIBOR quotation still is expected to cease at the end of 2021 and that no change in the timeline due to COVID-19 is expected. He encouraged accelerated preparation for cessation and praised the legislative measures under consideration by the UK Government and the European Commission, as well as the work of industry groups in the UK and United States.