Brexit, EU regulation and a new benchmark

Benchmark bother: Europe frets over new risk-free rate

Unsecured fixing from ECB faces off against two repo-based rates, as 2020 benchmark deadline looms large

CLS seeking legal fix for Brexit settlement threat

Market infrastructure firm wants EU27 to protect trades in insolvency by tweaking local laws

Q&A: EU’s Hübner on Brexit and future of equivalence

Top EU lawmaker discusses improvements to equivalence, contract continuity and clearing relocation

COMMENTARY: Time running out

SOFR has had a stumbling but successful start; Sonia is still not attracting much interest; time is running out for Ester. The process of replacing the Libor benchmark rate is moving at different speeds in different markets, and tension is starting to rise as traders wonder whether it will move fast enough.

SOFR, the Secured Overnight Funding Rate, was given the green light by Standard & Poor’s this week – unfortunately just too late for investors to get in on the debut SOFR note launch a few days previously. Getting the rate used as the benchmark for a floating-rate note is seen as a major step towards widespread acceptance, and it follows the European Investment Bank’s issuance of a Sterling Overnight Index Average (Sonia) note in June.

Both markets, though, are still ahead of the eurozone, where the 2020 deadline to agree on a new risk-free rate is drawing close, and a decision has yet to be made. The European Central Bank’s euro short-term rate (Ester) benchmark, based on unsecured lending, has yet to be published, and the bank originally intended not to release it until October 2019, leaving just three months for a functioning derivatives market to develop before the existing Eonia benchmark is blocked. The ECB has now hinted it may bring the deadline forward; but no definite statement has been made, and so far there is no indication of a new launch date.

Nor has Ester been confirmed as the new eurozone benchmark yet. Two other repo-based rates are also candidates, and the debate continues over whether a secured or unsecured rate would be more suitable. Market participants though, generally see Ester as the front-runner.

In an effort to prepare early, some dealers have suggested creating a term structure of Ester by defining it as a spread on Eonia. But few would likely be prepared to trade anything based on such a curve, especially given that it’s linked to the outgoing Eonia.

As the weeks go by, the risks associated with benchmarks in the eurozone will only grow. There is very little time in practice to choose, introduce and promulgate a new benchmark rate and associated derivatives market before Eonia is culled, so above all else the ECB needs to provide certainty to the market well before the 2020 deadline.

STAT OF THE WEEK

Standard Chartered sheared $2.4 billion from its market risk-weighted assets – an 11% drop – over the first half of 2018, thanks to reductions in debt held for trading, as well as the bank’s use of its internal model to assess certain structured products. Market RWAs fell to $20.6 billion at the end of June from $23 billion on January 1.

StanChart culls debt, switches model, and market RWAs drop

QUOTE OF THE WEEK

“I’ve traded mortgages since 1992, and throughout my career the GSEs [government-sponsored enterprises] were the backstop for the market. They would step in and provide liquidity if the market got dislocated. When the GSEs were put into conservatorship, the Fed took over the mantle. As of this fall, the Fed is out, and now there’s nobody” – Colin Teichholtz, Blue Mountain Capital Management