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The manipulation of the Libor reference rate has severely damaged trust in the banking system. In response, standard-setters and supervisory authorities have taken steps to implement a variety of new rules. The Euribor will in future only be determined for the most common tenors. This is based on recommendations made in January 2013 by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to the European Banking Federation (EBF). Moreover, since 1 June 2013, banks that participate in determining the EONIA (Euro Overnight Index Average) no longer have to participate in determining Euribor.
At the beginning of June, the two European supervisory authorities also published principles for benchmark-setting processes that are binding on banks and insurers. The aim is to make the benchmarks less susceptible to manipulation and more representative and transparent. The principles cover the entire process, from the provision of data to the publication and use of the benchmarks. The European Commission is also planning to make manipulation of benchmarks a criminal offence by extending the scope of the Market Abuse Directive.
Dr Elke König, BaFin president, said in a recent interview that activities launched to regulate reference interest rates had been by and large the right ones, but simply revising the rules for the Euribor and the Libor was not enough. "Our ultimate goal has to be to find alternatives to these reference interest rates. The global financial system cannot afford to work with benchmarks that are largely based on estimates", she said.
The fact remained that that Euribor and Libor were major, important benchmarks and many products were based on them, she continued. That’s why they could not be replaced straight away but why an orderly transition had to be ensured. The search for suitable alternatives had already begun, meaning benchmarks that are based directly on observable transactions entered into on liquid markets.
EONIA, an important benchmark for pricing very short-term unsecured money market transactions, wasn’t the problem, she said, as it was calculated by the European Central Bank on the basis of actual interbank transactions. She further welcomed the principles for setting benchmarks drawn up by EBA and ESMA, even though only banks and insurers had to comply with them. This meant that supervisors could only appeal to banking associations, stock exchanges and other players to adhere to them as well. However, the legal basis could change soon, with the Commission having already proposed making the manipulation of benchmarks a criminal offence and it aiming to publish a proposal for a regulation on benchmarks, she concluded.