Markets in Europe are set for a major change as the ECB prepares to alter the way finances are calculated across the continent. The current key interest benchmark, the euro overnight index average (EONIA), which is used price more than €24tn of derivatives, loans and bonds, will be replaced in less than two months, the Financial Times reports. The EONIA is the current overnight benchmark rate for the euro – the largest single currency in the world.
The rate is used for many financial contracts including mortgages, bank overdrafts, and other more complex financial transactions.
Businesses, banks and other organisations also use benchmark rate to value items on their balance sheets.
The benchmark is most commonly used to calculate the rate at which banks can lend and borrow money.
However the method will be phased out from October 2 by a new benchmark called the €STR (euro short-term rate).
The €STR is designed to reflect how much a bank must pay when borrowing money overnight from various financial counterparties without providing collateral.
The new method will be implemented to provide a wider scope than EONIA – which only looks at trades between banks.
The ECB has been under pressure to replace the EONIA following a series of market manipulation scandals.
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Meanwhile, the body for advising the ECB has warned of “complacency among market participants” ahead of the change.
Steven van Rijswijk, the head of the steering group head and chief risk officer at Dutch bank ING, told the Financial Times: “I am worried about complacency among market participants, especially as regards the change in the timing of the publication of Eonia, which takes place already on October 2 and creates very significant operational challenges.”
Mr van Rijswijk also highlighted millions of financial documents will also need to be altered.
He added: “This could give rise to financial and risk reporting issues and could also lead to disputes among market participants.
“This can all be avoided if all market participants are adequately prepared.”
During the transition period both €STR and the transition EONIA rate will be published before the EONIA is no longer used at the start of 2022.