Firms Need to Prepare for Eonia and Euribor Replacement Now According to New Oliver Wyman Report

London, 18 June 2018 - Financial institutions need to start preparing now for the transition away from the Euro Overnight Index Average (Eonia) and the Euro Interbank Offered Rate (Euribor) rates or face increased costs and risks, according to a new report from Oliver Wyman titled “A Tale of Two Benchmarks: The Future of Euro Interest Rates.

Eonia and Euribor are critically important interest rate benchmarks for the eurozone. Together, they are used as reference rates for >$175 trillion of wholesale and retail financial products, including long-term residential mortgages in Finland, Spain and Italy. Yet they are about to be either replaced or transformed, because neither currently complies with the recently introduced EU Benchmarks Regulation (BMR).

“Preparations are already underway for a transition away from LIBOR, the equivalent to Euribor for US Dollars and other major currencies,” said Serge Gwynne, Oliver Wyman partner. “However, there has been much less attention on Eonia and Euribor, which will have a much shorter transition time. Firms need to act now to develop transition plans, with transition estimated to cost over $100 million for some firms. Delaying action will only increase the final transition costs and will amplify the financial, operational and reputational risks.”

The report explores how Euribor may be reformed to allow a seamless transition (in the best case scenario), but questions remain on whether this best case scenario is achievable by the 1 January 2020 deadline. Given the volume of business involved, companies should have a Plan B for Euribor reform. For Eonia, there will be no reform attempts and so a transition to an alternative rate will be required before January 2020. An alternative overnight reference rate is not yet available although the ECB is working on ESTER (Euro Short-Term Rate) and plans to launch before 2020.

While the reform processes for both Euribor and Eonia are in flux, market participants should not wait to act. The report identifies five steps firms can do now to prepare for the transition: 

  1. Support industry-wide initiatives to reform Euribor and to develop alternative reference rates for both Euribor and Eonia.
  2. Ensure robust written contingency plans are in place in case a benchmark materially changes or ceases, as required by BMR.
  3. Take "no-regrets" moves to mitigate potential future challenges and risks, such as changes to fall-back langage in contracts, evaluating conduct and legal risks, and making disclosures to clients related to new transactions referencing Euribor or Eonia.
  4. Perform an "enterprise scan to assemble an inventory of Euribor and Eonia usage across products and front-to-back process, and to assess transition challenges and impacts.
  5. Develop a phased transition playbook so that a programme can be launched and executed quickly if and when needed.

“The transition to the new benchmarks will be challenging especially as market participants are already grappling with the realities of a LIBOR conversion,” Serge explains. “However, since Eonia and Euribor are not compliant with BMR, this means they cannot be used for contracts entered into after 2020 unless remedial actions are undertaken to reform the benchmarks.”

To read the complete report, please click here.  For additional insight around LIBOR, please click here.

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