ECB to launch new reference rate after failed reform

The European Central Bank will launch a new overnight reference rate by 2020, it said on Thursday, after an industry-led revamp of the fraud-hit Euribor benchmark failed earlier this year.

The unsecured overnight interest rate, which will be a backstop reference rate, will complement existing benchmark rates and be based entirely on reported transactions, the ECB said in a statement.

Inter-bank lending rates such as the Euro Interbank Offered Rate (Euribor) and its London equivalent Libor are used to price billions of euros worth of derivatives and, in some countries, to determine interest rates on mortgages.

Central banks and regulators from around the world have been working to develop alternative benchmarks, seeking to reform the current system after allegations of manipulation by commercial banks that distorted reference rates.

The ECB acted after a plan to reform Euribor failed earlier this year, with banks complaining that a new transaction-based system would have an excessive impact on rate levels, volatility and transaction volumes.

“The interest rate, which would be produced before 2020, would complement existing benchmark rates produced by the private sector and serve as a backstop reference rate,” the ECB statement said.

“This interest rate will be based entirely on transactions in euro that are reported by banks in accordance with the ECB’s money market statistical reporting.”

The ECB will unveil the key features of the new rate next year, then ask banks to provide feedback.
Source: Reuters (Reporting by Balazs Koranyi; Editing by Mark Heinrich)