Global Daily – ECB takes first step in EONIA alternative

by: Fouad Mehadi , Kim Liu

Euro Money Markets: New ECB measure more negative than EONIA – The ECB today released for the first time statistics on the unsecured euro money market (see here for the press release). The statistics, which come from the ECB’s own money market statistical reporting (MMSR), cover real transactions from the 52 largest euro area banks. As of today, the ECB will continue to publish unsecured money market data in order to enhance market transparency and improve money market functioning.

Today’s decision to release the unsecured money market data follows earlier plans by the ECB to introduce a new overnight benchmark rate. Indeed, the ECB indicated that “the statistics will complement the ECB’s initiative to develop a euro unsecured overnight interest rate by 2020”. Last September, we already reported about this possibility and mentioned that the new rate would most likely serve as a backstop to EONIA (see here). The pro-active position to set up a new unsecured money market rate is at odds with the laisse faire stance of the ECB towards a transaction based EURIBOR. Up to now, the ECB has thrown the ball back in the court of the banks and banking association EMMI (European Money Markets Institute) to take the lead in creating a more robust and credible EURIBOR. The difference in stance is most likely due to the direct importance of EONIA for the ECB’s monetary policy transmission mechanism. EMMI has in search of a new transaction based EURIBOR encountered difficulties as it deemed that it was not possible to have a seamless transition towards this new rate. As such, it decided to focus on a hybrid version, which is a combination of a transaction and quote-based methodology.

Today’s data showed that the daily average borrowing turnover in the unsecured market was EUR 109bn in the last maintenance period (13 September to 31 October), while the total stood at EUR 3,811bn. In addition, the weighted average overnight rate for borrowing transactions was -0.38% for the interbank sector and -0.40% for the wholesale sector (which includes the government sector, corporations and banks).

The statistics on the overnight rate in the interbank market are more negative (by around 2.5bps) than the simple average of EONIA over the same maintenance period as published by EMMI. This can be explained as the composition of participating banks is different. The ECB uses data from the largest 52 euro area banks, while EMMI publishes EONIA which is based on a panel of 29 banks. Since both the ECB’s unsecured rate and EONIA follow a weighted-average methodology, we judge that the ECB’s rate could potentially be more skewed towards larger transactions by some banks, which apparently impacts the reference rate more negatively.

Nonetheless, today’s data should give the ECB some initial comfort in its search of having a more robust transaction-based backstop. However, it is too soon to cheer. EMMI concluded that over a longer period and especially in illiquid periods, EURIBOR was susceptible to volatility. It will therefore be interesting to see how volatile the ECB’s reference rate will be over time and if it will be more robust than EONIA. (Fouad Mehadi and Kim Liu)