The Euro risk-free-rate working group of the ECB has published its final recommendations for €STR-linked fallback rates for EURIBOR.
You can find the final recommendations here.
Broadly speaking the RFR working group recommends that any EURIBOR instruments or contracts should make provisions for permanent cessation, temporary non-availability, and pre-cessation triggers for EURIBOR (including the date of application for the fallback rates). The recommendations also illustrate what should constitute genuine trigger events for EURIBOR fallbacks.
With respect to the fallback rates, the recommendation includes two key component rates:
- A forward looking term structure on the basis of quotes and transaction in €STR derivatives markets
- A backward looking term structure based on compounding past daily fixings of the overnight risk free rate.
Some key rate recommendations
- For corporate loans specifically, the working group recommends an optionality of choosing between immediately using the backward looking methodology or incorporating a fallback waterfall consisting of a forward looking fallback rate primarily and a backward looking rate as the secondary option.
- For transfer pricing models, the working group recommends leaving it to the discretion of market participants as to whether to incorporate EURIBOR fallback measures or not.
- For trade finance products, the group recommends a waterfall structure consisting of a forward looking rate on the first level and a backward looking last reset rate on the second level.
- For debt securities the group recommends a backward looking fallback rate.
Credit spread adjustment recommendation
- Five year historical median spread adjustment for cash products – which aligns with the ISDA recommendation for derivatives.
- If the depth of the €STR market is insufficient at the time of calculation, then historical EONIA data should be used with an adjustment of +8.5 basis points.
The working group also makes recommendations for conventions to be used when utilising the backward looking fallback rates and for those looking for more information on Euro transition see: Working group on euro risk-free rates (europa.eu).
Tarek Tranberg
Head of Public Affairs & Policy
EACT
