Shifting benchmarks, shifting the rate curve
In many films, stories frequently start by once upon a long time ago there were questions about the soundness and robustness of the major benchmark rates: LIBOR, EURIBOR and EONIA. The time referred to is the culprit of the financial crisis; this happened during that period where at least two of these three benchmarks were subject to what is diplomatically “necessary adjustments” to mitigate the hectic trading.
In practice, given that these benchmarks based on contributions, actual trades, and the rates reported were sometimes diverging from market prices. The supervisory authorities were displeased with the situation that lead to the near collapse of LIBOR.
Several decisions were taken, among these was the creation of a benchmark regulation, the profound review of benchmark’s governance and the seeds of the need to rely on market prices instead of contribution was ingrained.
Assuming that the idea to move from one benchmark to another was shared by a small group of authorities, which was not the case for the majority of users and part of the supervisory authorities. The underlying reasons were as follows; the timing was inappropriate, on the back of the crisis, and above all that potentially moving from these benchmarks meant impacting several hundreds of trillions of euros and contracts linked to the benchmark rates, every floating rate, be it for a loan, derivative or saving was concerned.
The project was deferred on several occasions until the right time. Now, the right time has arrived.