The Future of IBORs
Interest rate benchmarks including, among others, the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being overhauled. It is expected that any products that reference an IBOR as an interest rate benchmark will be transitioned to a risk free rate (RFR). Clients should be aware of the potential impact these reforms will have on products they currently have or will obtain in the future.
MUFG will contact clients directly to outline the steps we are taking to ensure the transition to any RFR runs smoothly, and to explain any impact that may be felt. If you require further information or have queries relating to IBOR discontinuation, please contact firstname.lastname@example.org.
EONIA and €STR
The European Money Markets Institute (EMMI) has announced that EONIA will be discontinued as an interest rate benchmark from 3 January 2022. Until 31 December 2021, EONIA may still be used in financial agreements, however, you should be aware the determination methodology underlying the calculation of EONIA and the time of its publication has changed.
The Euro Risk Free Rate Working Group recommended €STR (a new rate developed by the ECB whose publication began on 2 October 2019) as the alternative Euro risk-free rate to EONIA.
The transitional provision of the EU Benchmark Regulation (BMR) requires EU firms to only use registered or authorised benchmarks which comply with the BMR in new contracts from 1 January 2020 onwards. Following a consultation on the transition path from EONIA to €STR,the Euro Risk Free Rate Working Group recommended that EONIA be reformed to be BMR compliant and to revise its methodology to become a rate equal to €STR plus a spread for a limited time, in order to facilitate the transition from EONIA to €STR.
Since 1 October 2019, EONIA for T has been calculated with this reformed methodology tracking the Euro Short-Term Rate (€STR) plus a fixed spread of 8.5bps, and will be published at approximately 09:15 Central European Time, each TARGET day on T+1. The fixed spread of 8.5 basis points is meant to measure the economic difference between the underlying interests of EONIA and €STR.
EONIA will be calculated under this recalibrated methodology by the EMMI until it is permanently discontinued on 3 January 2022.
Immediate Impact on the changes of EONIA
All references to EONIA in your financial agreements with MUFG will continue to reference EONIA as amended under the recalibrated methodology with effect from 2 October 2019. This means that any calculations in your financial agreements that reference EONIA will automatically be administered on the basis of the EMMI revisions to EONIA that took effect from 2 October 2019. EONIA will continue to be published under the same identification codes, i.e. Reuters Instrument Code or Bloomberg ticker.
EONIA publication time
EONIA publication has changed to TARGET2 business day (T+1) at approximately 09:15 CET to reflect the trading activity of the previous TARGET2 business day.
Accordingly, the change in publication time will result in a shorter period for the settlement of any relevant amounts payable under your financial agreements. For example, where you have agreed with MUFG that any amounts under your financial agreements are settled on the last day of a relevant month, it may be that in order to continue under this arrangement, EONIA is applied on a T+0 basis using the rate that is published on the previous day.
€STR publication time
On 2 October 2019, the ECB began publishing €STR. €STR is calculated based on the data reflecting trading activity on day T and published by the ECB on the next TARGET2 business day T+1 at 08:00 CET.
What happens when EONIA is discontinued?
EONIA and €STR will continue to coexist until 31 December 2021 at which point EONIA will be discontinued. Over this period of time, the market will gradually replace EONIA with €STR in all products and contracts. After that, the €STR will become the new overnight lending reference rate. Therefore, after 31 December 2021 it will not be possible to use EONIA as an interest rate benchmark. Clients may need to replace EONIA with an alternative benchmark for any financial agreements that references EONIA and continues after 3 January 2022. The 'Working Group on Euro risk free rates' has recommended €STR as the replacement benchmark for EONIA. We are currently monitoring this recommendation for adoption and will assess its full implication on any financial agreements before taking any definitive steps, and contact clients in due course to confirm our approach.
What are the key differences between €STR and EONIA?
- The following summarises some of the key differences between €STR and EONIA:
Administered by EMMI (EMMI is the calculation agent)
Administered by ECB
€STR + 8.5bps
Methodology uses overnight unsecured fixed rate deposit transactions over €1 million.
Only inter-bank lending – reflects the rate at which banks in the EU lend in the interbank money market in euros
Will include other bank lending such as money market funds, insurers and other financial corporations. Reflects the wholesale euro unsecured overnight borrowing costs of euro area banks
If you would like more information on EONIA and recommendations in respect of €STR made by the Euro Risk Free Rate Working Group, the ECB have published information on its website.
This page and its related content are not intended to be, and should not be relied upon as, legal, financial, tax, accounting or other advice. We are not providing you with any such advice and you should consult your own advisors for advice on the reform of interest rate benchmarks and the related risks. We make no representation and provide no warranty as to the information set out in herein, which is based on information from third parties, and you should not rely on any such information as constituting a representation or warranty. The content herein is not intended to be comprehensive and were last updated in Feb 2020. Material developments may have occurred since this last update. This page and its related content do not consider risks to you from interest rate reform and there may be other issues that are not highlighted below. Without limiting the foregoing, this page and its related content do not address issues specific to any particular sector or business. We are not acting as your fiduciary or adviser and the provision of this information to you will not give rise to any duty of care. We assume no responsibility for any use to which these this information may be put. The areas covered herein are continually evolving and you should consult the relevant sources. Links to some of the relevant working and industry groups are at the end of this document.