Eonia, Libor and other benchmark problems

The week on Risk.net, June 9-15, 2018

7 days montage 150618

Eonia death will hit valuations and OIS market – expert

Working group hears end of Euribor by 2020 would threaten financial stability

Some banks open to committing to Libor post-2021

At least two houses concerned about risks of transitioning to alternative rates

NDF nightmare: banks seek fix for benchmark ‘mess’

European firms face bar from using three Asian fixings from 2020, raising concerns about legacy trades


COMMENTARY: Wrenchmarks

The financial industry discovered a host of new problems this week surrounding the transition to a new, and theoretically more reliable, set of benchmarks. Libor, discredited after it was discovered to have been regularly rigged by its contributor banks, may have been granted a new lease of life. Even after 2022, when banks will be free to stop contributing to the benchmark, many may continue voluntarily – producing a so-called ‘zombie’ Libor. But handling the triggers for cash and derivatives products in this scenario won’t be easy – and failure to synchronise them could result in hedges misfiring when they are most needed.

Meanwhile, the end of the Eonia interbank benchmark could have any of three outcomes, the European Central Bank says. One scenario sees widespread disruption of the interest rate swap market and problems with valuation, as the market switches to the Euribor benchmark. That’s the best-case scenario.The other two scenarios are much worse, an ECB expert panel warned, and involve significant threats to international financial stability.

Then there are problems with Asian benchmarks. European firms may be barred from using three Asian fixings from 2020, if – as seems likely – the Korean won, Philippine peso and Taiwanese dollar fixings are ruled to be incompatible with the European Union’s Benchmarks Regulation due to come into force in January that year.

All this – the decline of Libor, the need for the Benchmarks Regulation and questions over the survival of Eonia and Euribor – can ultimately be traced to the same root: the decision by a relatively small group of traders that Libor submissions need not be determined honestly and dispassionately, but could be shaped to their own benefit. The replacement of Libor by a market-derived benchmark was probably even then long overdue; the discovery of the benchmark-rigging scandal, though, meant the replacement was forced on the market rather than being implemented in a gradual and orderly fashion. Few failures of professional ethics have had such a profound effect.



Model updates accounted for a net £4.6 billion increase in aggregate risk-weighted assets across HSBC, Lloyds, RBS, Standard Chartered and Barclays last year. Methodology and policy changes resulted in a net –£3.4 billion decrease. These were equivalent to capital charges of £368 million and –£272 million, respectively.



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