1. More concretely, what does this reform entail?
Our previous name was only referring to Euribor whereas we administrate other European benchmarks (e.g. Eonia and Eurepo) and we also manage the STEP label, and initiative aimed at fostering the integration of the short-term paper market in Europe through the convergence of market standards and practices. It was important to also reflect these activities in the name of the Institute.
Last but not least, this change also formalises the operational independence of EMMI from the European Banking Federation, even though they were already two different legal entities.
2. A recent IOSCO report including principles for financial benchmarks underlined the progress made so far by EMMI, notably in terms of improved governance. What has been achieved so far? What are the remaining challenges?
We are happy to see the positive acknowledgement of our continued efforts to raise the transparency of the rate-setting process, develop a control framework and enhance the benchmarks governance.
Some of the most significant measures taken so far included introducing a new Euribor Code of Conduct, applicable since October 2013, as well as a Code of Obligations for Panel Banks. We have also strengthened the independence of the Euribor Steering Committee and reduced the number of tenors. In terms of governance and control framework, we have developed a series of policies and procedures such as Conflicts of interest policies and procedures (overseen by a Conflicts of Interest Oversight Committee), a contingency plan, a record-keeping policy, and a robust back-testing procedure. Whistleblowing and Complaints policies and procedures are also underway, as well as Confidentiality and Consultation policies. This list is non-exhaustive. As we always privilege transparency, people can follow the adoption and implementation of reform measures on our website.
In parallel, we have been working with the banking industry and the European Central Bank in order to develop a transaction-based euro unsecured money market benchmark. The proposed new benchmark would represent the cost of funds, that is, bank borrowing, rather than bank lending as in the current Euribor. It would envisage a broader scope of transactions, essentially all sources of borrowing in the wholesale markets. The next step will be to present it to the end-users in a workshop scheduled in October.
The main remaining challenges that we face now are, on one side, the implementation of IOSCO Principles related to data sufficiency and transparency of benchmarks determinations as, even though we have been working on transparent and specific criteria to determine submissions, they are inherently linked to the current Euribor definition as a benchmark based on estimates. In addition, the critical issue of the transition to a new benchmark remains the biggest challenge of all. We, like the authorities and the market participants, still need to figure out how to deal with transition issues given the huge amount of long-term contracts based on Euribor.
We will pursue our efforts to find adequate solutions to these challenges and continue implementing the outstanding measures.
3. The Commission’s proposal for a Regulation on indices used as benchmarks from September 2013 figures among some of the 40 unfinished legislative files. This proposal should be discussed under the Italian EU Presidency. What are your expectations on this file? What would you recommend?
We have been waiting for such Regulation for long, in particular for the possibility for the competent authority to impose mandatory contribution to a critical benchmark. Indeed, the size of the panel of contributing banks has considerably decreased since 2013. In the current environment, contributing to an index may be considered as an additional burden, given the costs and resources that enhanced compliance and governance measures generate, as well as a potential source of reputational risk. Repeated departures from the panel may lead to the discontinuation of the index which would have dramatic consequences for the benchmark’s users, including the banks and their clients, and lead to serious financial stability issues.
Nevertheless, we are concerned that the complexity of the supervisory mechanism described in the EC Proposal, involving the national authority of the administrator’s country, colleges of supervisors for critical benchmarks and ESMA’s binding mediation could be counterproductive in case of a critical and urgent situation.
Other aspects, such as the administrator’s responsibilities in the identification and reporting of breaches (with regard to the Market Abuse Directive and Regulation) or misconduct and the publication of input data used to determine the benchmark immediately after publication , still need to be debated and clarified.