ICE backs consultation to strengthen Euribor lending rate

Intercontinental Exchange has welcomed a consultation designed to strengthen Euribor, the reference rate for the main European short-term interest rate (STIR) derivatives market operated by the US group.

US-based ICE, which runs Europe’s largest STIR market, has welcomed last week’s announcement that the European Money Markets Institute (EMMI) had proposed changes to the Euribor methodology including the discontinuation of submissions based on expert judgment.

Stelios Tselikas, head of Interest Rate Derivatives at ICE who assumed that position at the start of this month, said: “This latest consultation from EMMI is another step to evolve and further strengthen Euribor as a global benchmark rate. Euribor is well understood by investors, which allows them to take positions on interest rates when they need to. This is critical in this uncertain rates environment.”

Belgium-based EMMI said last week its proposal will “diminish” Euribor panel banks’ operational and cost burden, and provide an opportunity to expand the Euribor panel.

EMMI invited interested parties to submit their opinions on the proposals no later than December 11 this year, after which time the feedback will be considered and published before the end of February next year.

Tselikas added: “ICE’s Euribor futures and options are deeply liquid, transparent markets that retain the confidence of market participants globally, providing a base to manage rates exposure, allocate capital and as a tool for price discovery of risk, especially as rates remain higher for longer.”

The EMMI proposals are designed to fortify the Euribor rate which is facing competition from the European risk-free rate known as the Euro Short Term Rate (€STR), which does not contain material term risk or credit risk.

The UK and US have completed their migrations from their legacy Libor-based lending rates to their respective risk-free rates but the European authorities have not mandated such a transition, unlike their peers in London and Washington.

Despite the lack of a mandate, €STR has enjoyed some take-up. CME Group and Eurex have reported this year a pick-up in €STR futures trading volume.

But these markets are still small in comparison to ICE Futures Europe’s three month Euribor contract which remains the leading European short-term interest rate (STIR) hedging product.

Frankfurt-based Eurex plans to relaunch its Euribor contract at the end of this month backed by a liquidity incentive scheme, in a direct challenge to ICE’s dominance of European short-term rates.