In late February 2018, the European Central Bank (“ECB”) published a summary of comments by market participants and third parties on its proposal to introduce a new unsecured overnight Euro interest rate. This public consultation was the first step in the ECB’s plan to implement the rate before 2020. The following is a summary of the consultation’s responses:

  • Participants generally approved the definition proposed by the ECB
  • The new rate is expected to replace the existing references made to EONIA
  • Issues were raised about the liquidity and trading volume in the unsecured interbank market, making it a relevant rate (especially for derivative markets)
  • Concerns were expressed that normalising liquidity conditions and stringent regulatory requirements may lead to transactions being too narrow in nature
  • Deals with governmental entities and non-financial institutions should not be taken into consideration
  • Respondents questioned the benefits of including a threshold, and
  • Late publication of the rate may negatively impact it, although the majority of responses indicated that the publication should be before 9 a.m., before markets open for business.

Consequently, on 15 March 2018, the ECB launched its second public consultation to better define the methodology for calculating the rate, and essential operational and technical parameters, based on the following definition: “The [new ECB unsecured overnight rate] is a rate which reflects the wholesale euro overnight borrowing costs of euro area banks. The rate is published daily on the basis of transactions deemed to be executed in market conditions and at arm’s length.”

The second public consultation focusses on data sufficiency, calculation methodology, operational parameters, and the use of the rate. In particular, the ECB welcomes comments related inter alia to:

  • Whether EUR 1 million is an adequate threshold for transactions to be taken into account
  • Whether 25% trimming should be applied to decrease rate volatility
  • The criteria for calculating a contingency rate, and
  • How to correct published rates.

Interested parties are invited to submit their responses here no later than 20 April 2018.

The ECB intends to start publishing regular rate runs for its new rate in the second half of 2018, after a methodology has been agreed upon. We will update you once the ECB reports the results of its second consultation.