Isabel Schnabel: Welcome address
SPEECHWelcome addressWelcome address by Isabel Schnabel, Member of the Executive Board of the ECB, at the third roundtable on euro risk-free rates Frankfurt am Main, 14 December 2020 Good afternoon and welcome to the third roundtable of the industry working group on euro risk-free rates.
SPEECH
Welcome address
Welcome address by Isabel Schnabel, Member of the Executive Board of the ECB, at the third roundtable on euro risk-free rates
- Frankfurt am Main, 14 December 2020 Good afternoon and welcome to the third roundtable of the industry working group on euro risk-free rates.
- Not least, it has forced us to transition to virtual modes of working.
- I very much hope that the public health situation will soon allow us to meet again in person.
- Todays roundtable will provide a platform to exchange views on the development of robust fallback provisions for EURIBOR, which remains a systemically relevant benchmark.
The motivation for robust EURIBOR fallback provisions
- As a result, EURIBOR is still used extensively in both new and legacy contracts for cash and derivatives products.
- Given that EURIBOR remains operational, why do we even need to discuss fallback arrangements?
- If the benchmark rate ceased to exist, the absence of a fallback rate would expose the counterparties to substantial risk.
- Fallback provisions therefore act as seatbelts for contractual arrangements in financial markets.
- In fact, there is already a legal requirement to use fallback provisions.
- In addition to these legal requirements, there is also a clear financial stability justification to ensure there are workable fallback provisions that reduce contractual uncertainties in the event of EURIBOR ceasing to exist.
Public consultations: the role of the €STR as a fallback rate
- However, this basic premise begs a more difficult question: what are feasible alternative rates that can be used if a fallback scenario is triggered?
- In an effort to address this question, the working group has recently launched two public consultations.
- The public consultations build on a common theme, namely the use of the ECBs STR in the proposed fallback measures.
- For the public consultation, the working group has used two alternative STR-based approaches to approximate a term rate that could serve as a fallback.
- Second, the working group has used realised values of the STR and compounded them over the interest period, thus deriving a backward-looking term rate.
- The STR is a suitable rate for use in EURIBOR fallback arrangements.
Discontinuation of EONIA: the urgent need for a rate transition
- As EONIA has been converted into a STR tracker rate, the benefits of switching to the STR may not be immediately obvious.
- There are two reasons why market participants should urgently work on their preparedness for an orderly transition from EONIA to the STR.
- First, the discontinuation of EONIA is imminent, with its last publication scheduled for 3 January 2022.
- If the proposed fallback provisions were ever activated, the market would have to rely extensively on the STR.
- The ECB will continue to facilitate the replacement of EONIA in euro area markets by maintaining a robust and representative STR.
Conclusion
- The STR is an ideal candidate for this transition.
- It can support market participants in building robust fallback procedures for a potential discontinuation of EURIBOR.
- Users should therefore swiftly replace EONIA and make wider use of the STR in cash and derivatives markets.
- I would also like to thank the ECB team that has been supporting the working group by providing the secretariat.
- I now wish all of you an insightful and productive roundtable.