Eurex sees opportunity in transition to risk-free rates

Eurex has said it sees an opportunity to offer products linked to secured and unsecured lending rates as the industry moves to a new risk-free rate, according to a senior executive.

“I think that we could potentially replicate what we see in the US if we were to list Ester futures,” said Lee Bartholomew, head of fixed income product design at Eurex.

“With our secured funding futures, we would then have a venue that provides the market with a secured and unsecured futures market which will help with the transition to a new risk-free rate,” he stated.

Ester, the European Central Bank’s newly developed euro short-term rate, is viewed by the industry as the most appropriate euro risk-free rate to replace Eonia ahead of another two shortlisted candidates : the GP Pooling Deferred rate produced by STOXX and the RepoFunds Rate produced by NEX Data Services.

Ester will reflect the wholesale euro unsecured overnight borrowing costs of euro area banks and will serve as a backstop reference rate for Europe’s transition to a risk-free rate.

The ECB has said it will begin publishing Ester by October 2019.

“Ester is something we would look to move into, once we have more clarity on the ECB timeframe,” Bartholomew stated.

The European Central Bank (ECB) on September 25 welcomed developments on the alternative benchmark for the short-term market, but said progress with respect to longer tenors is “yet to be seen”.

The Bank of England implemented its reform to the Sterling Overnight Index Average (Sonia) interest rate benchmark in April after Sonia was chosen by a group of 16 major banks as the preferred RFR alternative to Libor. 

Commodity Futures Trading Commission chair Chris Giancarlo said in July he expects Libor to disappear in the coming years, and highlighted a number of concerns with regards to the uptake of the Secured Overnight Financing Rate.