Reforms

BMR compliance

The acronym Euribor^® initially stood for ‘Euro Interbank Offered Rate’ and indicated what the benchmark used to measure: the interest that major banks would ask each other for the provision of funds.

The European Money Markets Institute conducted in-depth reforms – at governance and methodology levels – in recent years to meet the requirements of the Benchmarks Regulation of the European Union (BMR). The primary goal of the Euribor^® reform was to provide the market with a transparent, robust, and representative index, while minimising the risk of market manipulation.

The underlying interest of Euribor^® has been clarified and its determination has shifted from a quotes-based to a transactions-based methodology. In the wake of this reform process of Euribor^®, The European Money Markets Institute was granted, in July 2019, an authorisation by its supervisor – the Belgian Financial Services and Markets Authority (FSMA) – for the administration of Euribor^® under BMR.

The authorisation was a high point as it has confirmed that the Hybrid Methodology is robust, resilient, and transparent, but also that it fully meets the stakeholder’s expectations. For the market, it is also a guarantee of transparency and integrity, with the implementation of solid governance and control arrangements.

The European Securities and Markets Authority (ESMA) substituted the Belgian FSMA on 1 January 2022.

Major milestones

Initiative | Implementation of enhancements to the Hybrid Methodology

With the objective of further enhancing the hybrid methodology, at the end of 2021, EMMI started to explore the possibility of reformulating some of the methodology's levels in the waterfall approach and, as a by-product, discontinuing the recourse to Panel Banks’ expert judgment from the Euribor^® calculation. The key changes designed to address specific aspects of the benchmark while preserving its core characteristics, are the following:

• reformulation of Level 2.3 and 
• discontinuation of Level 3

EMMI publicly consulted on these changes at the end of 2023 and took the final decision for a phased implementation of the changes in 2024.

The implementation of the enhanced methodology followed a phase-in approach where panel banks migrated one by one over a period of 6 months, with the final bank phased-in in October 2024.

Annual review of the hybrid methodology for Euribor^®

The regulation of the European Union on financial benchmarks (BMR) requires benchmarks administrators to periodically review their benchmarks’ methodologies. The European Money Markets Institute performs a review of the Hybrid Methodology for Euribor^® on an annual basis with a twofold objective: confirming that the benchmark remains robust, resilient, and representative of its underlying market on the one hand, and identifying any potential for further beneficial recalibrations, on the other hand.

The first review exercise run in 2020 suggested that four non-material adjustments would improve the Hybrid Methodology for Euribor^®, namely:

• Reducing the minimum size threshold for eligible transactions from €20 million to €10 million
• Including T+3 settlement amongst eligible transactions
• Increasing the lookback period of usable historical Level 1 contributions by one day
• Rolling forward the quarterly Euribor^® futures used to adjust historical contributions by one TARGET2 day

These favourable amendments to the Hybrid Methodology for Euribor^® are implemented since April 2021.

BMR authorisation

On 2^nd July 2019, The European Money Markets Institute was granted an authorisation by the Belgian Financial Services and Markets Authority (FSMA) under Article 34 of the EU Benchmarks Regulation for the administration of Euribor^®.

The implementation of the Hybrid Methodology for Euribor^® by the Panel Banks – the so-called ‘phase-in’ – was progressive and spread over the last two quarters of 2019 to minimise any operational and technological risks for the Panel Banks, for Euribor users, and for the benchmark itself of course.

Development and implementation of the Hybrid Methodology

Based on the outcome of the Pre-Live Verification Programme, the focus was set on the development of a Hybrid Methodology, which would be fit-for-purpose at all times, and capable of adapting to the prevailing market conditions. The European Money Markets Institute sought to anchor, to the extent possible, the determination of Euribor^® in euro money market transactions reflecting its underlying interest.

Between March 2018 and February 2019, two public consultations on the Hybrid Methodology for Euribor^® were organised, based on the tenet that contributing banks would provide the Institute with data based on a three-level waterfall model with specific features applying to each level. From May to end of July 2018, the Hybrid Methodology was tested with 16 contributing banks. The testing phase proved successful, and feedback from all stakeholders indicated that the Hybrid Methodology for Euribor^® provided adequate robustness and representativeness.

Pre-Live Verification Programme

Between September 2016 and February 2017, The European Money Markets Institute carried out a Pre-Live Verification Programme and collected transactional data from 31 banks in 12 different countries. Based on the outcome, it was concluded that the transition of the Euribor^® methodology to a fully transaction-based methodology would not be robust enough, as the daily determination of Euribor^® would have been based, for most tenors, on a limited number of transactions executed by a limited number of contributors.