Refinitiv on forward-looking €STR term structures for EURIBOR
After 50 years as part of the global financial pipeline, LIBOR recently fixed for the very last time and has now ceased to exist as a representative benchmark. But before LIBOR teams look to disband, there remain several benchmark-related issues that still need to be determined.
Among them, the Euro-denominated interest rate market has its own unique challenges given that regulators remain committed to EURIBOR. Back in May 2021, the ‘Working Group on Euro Risk-Free Rates’ recommended a series of €STR-based fallbacks for EURIBOR. More recently, in May 2023 the Working Group published further 'guidance' for EURIBOR-based corporate lending products.
Notably, the Working Group warned that:
- "Corporate lending products now need to move to implement robust fallback provisions in new and refinanced EURIBOR referencing loans. Cost of funds and replacement of screen rate language are not workable permanent fallbacks and do not provide scalable options in the case of a possible permanent discontinuation of EURIBOR. Market participants are also reminded that they need to be operationally ready for EURIBOR fallbacks (be that compounded €STR in arrears or term €STR with a waterfall structure) … Now that term €STR rates are available alongside the already existing compounded €STR in arrears, there is no impediment to the full implementation of the May 2021 recommendations.”
As for the crucial task of formulating and administrating €STR-based fallbacks, Refinitiv is one of the data providers that has been developing forward-looking €STR term structures.
Refinitiv launched its ‘first prototype’ for what it calls ‘Refinitiv Term €STR’ in October 2022 based primarily on €STR OIS quote data. In June 2023, the company launched its ‘second prototype’ with a key development being the inclusion of data from €STR OIS trades transacted during the previous session and cleared at LCH (subject to a minimum notional size, plus a cap on the number of trades between the same counterparty pair for the same tenor).
Jacob Rank-Broadley, Head of LIBOR Transition at Refinitiv, explains the use of rates from the previous day’s session is to bring Term €STR more in-line with EURIBOR, “By incorporating the previous day’s data there is more consistency between the fallback rate and EURIBOR, plus the inclusion of executed trades makes it more robust.”
Elsewhere, SOFR and SONIA term rates have slightly different designs and calculations. For instance, Term SOFR is based on futures transactions while Term SONIA relies on OIS quotes. “The new Refinitiv Term €STR prototype is unique amongst term rate benchmarks as it brings together an OIS methodology and uses executed trade data,” notes Rank-Broadley.
The company recently launched a public consultation on ‘Refinitiv Term €STR’ with submissions open until 21 July 2023. Ahead, it plans to launch Term €STR as a regulated rate in September 2023, subject to pending approvals.