Background

IBOR (InterBank Offered Rates, e.g. USD-LIBOR, EURIBOR) interest rates play a prominent role as reference rates in the financial market and are therefore central to financial stability.

However

• the existing fixing procedures are vulnerable to manipulation (LIBOR scandal 2011),
•  turnover in the unsecured refinancing market (the market whose interest rate level is measured by IBOR rates) has been declining since the financial crisis,
•  the panels of banks that provide input to IBOR rates have become smaller over the years and therefore less representative.

The lack of robustness of IBOR rates due to their declining market significance and a simultaneously high volume of referencing contracts leads to concerns about systemic risks based on LIBOR, EURIBOR & Co.

The Financial Stability Board (FSB) published its report "Reforming major interest rate benchmarks" in 2014. It contains a number of recommendations in order to

• on the one hand, strengthen the existing benchmark interest rates by using actual transaction data to the greatest extent possible to back up these rates
• on the other hand, develop alternative, almost risk-free reference interest rates.

Legislators, regulators and central banks have responded by setting up working groups with the private sector which are to

• identify and recommend risk-free reference interest rates (RFRs) that can be used as alternatives to the existing benchmarks,
• complie plans to facilitate a switch to these RFRs by all market participants.

EONIA and LIBOR rates in particular are affected by the switching efforts.

Building on the FSB's report, the European Benchmark Regulation (EU BMR) was created - a legal framework for the accuracy and integrity of benchmarks approved in the Eurozone.

The EU BMR has been in force since 2018, but only to a limited extent. Currently, for example, the EONIA and LIBOR benchmarks, which are considered critical, as well as benchmarks from third countries, are excluded from the regulation and will only have to meet the requirements of the EU BMR after the turn of the year 2021/2022.

Among other things, the EU BMR regulates that

• the administrator of a benchmark has an effective governance and control framework to ensure the integrity and reliability of the benchmark,
•  the contributors also follow an effective governance and control framework,
•  the users of the benchmarks (contracting parties) have robust plans in case a benchmark ceases to exist.