To ensure Euribor’s robustness and representativeness, and comply with the European regulation on financial benchmarks and interest rate benchmarks (Benchmarks Regulation of the European Union or BMR), a Hybrid Methodology has been developed and implemented, allowing Euribor® to remain fit-for-purpose in any market circumstances, and always compliant with the latest regulatory requirements and industry recommendations.
With the Hybrid Methodology, the contributions to the determination of Euribor® made by the Panel Banks follow a three-level hierarchical approach.
Three levels in waterfall
Level 1 consists of contributions based solely on eligible transactions in the unsecured euro money market, with a minimal notional amount of 10 million euros – a criterion which has been amended in 2021 as the amount stood at 20 million previously. The contribution rate of each Panel Bank is calculated using the volume weighted average rate of the eligible transactions by tenor.
Level 2 consists of contributions based on transactions across the broader money market maturity spectrum. When a Panel Bank has insufficient eligible transactions for a Level 1 contribution to be calculated for a given tenor, but that it has had transactions in nearby maturities, or quite recently, the contribution can be calculated using a range of calculation techniques to make a Level 2 contribution for that same tenor. These can be:
- An adjusted linear interpolation from adjacent defined tenors
- Transactions at non-defined tenors
- Historical Level 1 contributions
Level 3 consists of contributions based on transactions from a range of markets closely related to the unsecured euro money market. Each Panel Bank uses specific input data, and tailor-made modelling techniques depending on their own funding models
Data input can, for instance and non-exhaustively, consist of transactions that could not be included in Level 1 – like transactions below the 10 million threshold but conducted at market rates – or data from markets closely related to the unsecured euro money market.
All Level 3 contributions made by a Panel Bank must be duly documented, validated, and always applied in a consistent fashion, under the guidance of The European Money Markets Institute.
The regulation of the European Union on financial benchmarks (BMR) requires benchmarks administrators to periodically review their benchmarks’ methodologies.
The European Money Markets Institute performs such review of the Hybrid Methodology for Euribor® annually with a twofold objective:
- Confirming that the benchmark remains robust, resilient, and representative of its underlying market
- Identifying any potential for further beneficial recalibrations