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EFAMA High Level views on ECB CP on EURIBOR Fallback Trigger Event & €STR-based EURIBOR Fallback rates

14 January 2021 | Policy position
EFAMA High Level views on ECB CP on EURIBOR Fallback Trigger Event & €STR-based EURIBOR Fallback rates

- Asset managers represent an important group of benchmarks’ users. In this context, EURIBOR rate is used by investment funds across all kinds of asset classes and financial instruments, as well as a benchmark for measuring fund performance, driving fee calculations and determining asset allocation.


- The identification of fallback rates for the contract with reference to EURIBOR are essential for asset managers and a stable and permanent approach would make the fallback clauses more robust and ensure further transparency. 


- For any new rate to be relevant from the asset managers’ perspective, it needs to be as representative as possible of the activity and the market-based funding costs in the market segment it covers. Moreover, transparency as to the underlying methodology used in each step of the calculation of the fallback benchmark remains critical. 


- Concerning the appropriate methodology to be used in order to build a €STR-based term structure that could function as a EURIBOR fallback, we believe that, while in principle, a forward-looking fallback rate seems appropriate given that EURIBOR is also forward looking, we still see merits in backward looking methodologies. At the same time, given ISDA’s recommendations in its Fallback Protocol for adjusted versions of the RFRs compounded in arrears, we would suggest a cautious approach and choice between forward-looking and backward looking methodologies with the main aim to avoid market inconsistencies. The importance of maintaining consistency between asset classes for hedging purposes and cross asset class investment strategies is one that cannot be understated.  What remains critical is a consistent approach firstly among asset classes and to the extent this isn’t always feasible a common understanding of the best approach for every asset class. In addition to that, we would also see an overnight rate (e.g. €STR, SOFR) as an option for an EURIBOR fallback as we are not aware of any requirements to have a fallback on fund level that is economically equivalent to EURIBOR. 


- A workable solution would also be to base the fallback definition on an OIS benchmark. Having a daily publication of a fixed rate which equals the market expectation of the overnight-compounded term rate has the advantage that like the EURIBOR term rates, the floating rate is known at the beginning of the accrual period and represents a forecast of rates on the right accrual period.  


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