ECB is consulting on the publication of compounded term rates based on the euro short-term rate (€STR). The publication would take place on a daily basis shortly after the €STR publication. Published maturities could range from one week up to one year. A daily index, making it possible to compute compounded rates over non-standard periods, is also envisaged as part of the publication. The consultation period will end on September 11, 2020 and ECB will publish an anonymized summary of the feedback received within three weeks of this deadline.
ECB would provide benchmark users with compounded values of the euro short-term rate (€STR) for selected maturities. The publication of compounded €STR term rates is expected to encourage the adoption of robust fallback provisions by the industry. Compounded rates based on the €STR would benefit from the proven robustness, as the €STR is built on an active overnight borrowing market. This implies that, even in times of market uncertainty, the compounded €STR rate will remain robust because the overnight markets remain, by far, the most liquid. Also, in a number of major jurisdictions, such as the US and the UK, the risk-free rates are expected to take over from London Inter-bank Offered Rate (LIBOR) for a large variety of contracts, on the discontinuation of the benchmark. Accordingly, the Federal Reserve Bank of New York and BoE also committed to publishing compounded risk-free rates and/or daily indices. Hence, the publication of a compounded €STR would support international consistency. This initiative to publish the compounded term rates would be in line with the:
- Recommendations of FSB, to encourage and support wider use of the near-risk-free rates and, hence, the €STR, by providing a “golden source” for the compounded €STR values
- EU Benchmarks Regulation, to provide a rate that may be used in contractual fallback provisions by users of the EUR LIBOR and EURIBOR, who are required to prepare in their contingency planning for a scenario in which the EUR LIBOR and the EURIBOR may cease to exist
Comment Due Date: September 11, 2020
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