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EMMI » EONIA® » Eonia Review

Eonia Review

 

February 2018 -  In light of the conclusions of the analyses performed in the context of the Eonia Review Data Exercise, together with the information on the overnight unsecured segment of the euro money market published by the European Central Bank, EMMI’s governing bodies have decided that pursuing a thorough Eonia Review is no longer appropriate.

In 2016, EMMI, as administrator of the Euro OverNight Index Average (EONIA), launched the EONIA Review, a programme which sought to enhance the governance and control framework for the EONIA benchmark, and align it with the requirements of the EU Benchmarks Regulation (EU BMR).

The EU BMR entered fully into application on 1st January 2018. As per this Regulation, benchmark administrators should ensure the benchmark determination methodology of the reference index they provide is robust, reliable, and resilient to guarantee the benchmark can be calculated in the widest set of possible circumstances, without compromising its integrity.

The Eonia Review was organized in two different phases: a first phase aimed at establishing a robust stand-alone governance framework for EONIA, which included the formulation of contingency and fallback arrangements to enable the calculation of EONIA under periods of limited input data or market stress; and a second phase focused on the enhancement of EONIA's methodology, which required a more in-depth analysis of unsecured interbank money market activity.

In the Eonia Consultative Paper of August 2016, EMMI presented the results of an initial analysis done with indicators derived from panel banks’ submissions, spanning seventeen years of Eonia’s life cycle from 1999 until the end of 2015.

The second phase of the Eonia Review started in summer 2017. As detailed in the Guidelines on the Eonia Review Data Exercise published by EMMI, an in-depth analysis on data covering a six-month period from 1st September 2016 to 28th February 2017 was performed. With this exercise, EMMI expected to gain a better insight on the market, and dynamics underpinning Eonia’s daily determination. This exercise would enable EMMI to assess the introduction of any potential changes in the Eonia data input, or its current calculation methodology (e.g. the inclusion of alternative parameters and currently non-eligible financial instruments).

According to the data received from participating banks, EMMI concluded that: EONIA presented a twofold concentration (on the one hand, interbank lending activity captured by EONIA presents a fair degree of concentration, and, on the other hand, there is a geographical concentration) and that the inclusion of currently non-eligible financial instruments (e.g. transactions with spot/next, and tomorrow/next maturities) does not have a significant impact on the representativeness of the Eonia benchmark.

The first conclusion above with respect to market concentration, is in line with the findings of the ECB in their analysis of the MMSR data, published in the First ECB public consultation on developing a euro unsecured overnight interest rate. This paper also gives an overview of other characteristics of the unsecured euro money market, such as its liquidity and size. The ECB’s paper states that “data availability for borrowing transactions is higher than that for lending transactions. MMSR data show that the number of active reporting agents each day is, on average, higher for borrowing than for lending, although the selection is limited to interbank transactions” (see page 15). It is indicated that the banks are more active in the borrowing side than on the lending side. Additionally, it concludes that “unsecured interbank funding has not been the main component of total unsecured overnight borrowing in the recent past as transactions with other financial corporations(including undertakings located outside the area) represent a sizeable portion of the unsecured borrowing” (see page 16).

On the basis of both EMMI’s Data Analysis Exercise and the exhaustive analysis illustrated on the above-mentioned ECB’s public consultation, redefining Eonia as an overnight wholesale borrowing benchmark would most likely allow for a more robust and representative interest rate, with a lower geographical concentration. These changes would require shifting to the borrowing side where higher volumes are captured, and including borrowing transactions with a broader range of counterparties.

EMMI considered that, under the then-current market conditions and dynamics, EONIA’s compliance with the EU BMR by January 2020 could not be warranted, as long as its definition and calculation methodology remained in its current format.

In this context, EMMI’s governing bodies decided that pursuing a thorough Eonia Review was no longer appropriate. Nonetheless, being aware of the importance of the EONIA reference rate, and in its role as administrator of the index, it  adopted an updated version of the Eonia Governance Framework, which set a minimum set of standards to ensure the robustness of the benchmark.

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