Eonia Spike Puts Spotlight Back on Unsecured Benchmarks

(Bloomberg) -- While the storm surrounding Eonia has come and gone, its sudden spike higher last week is raising fresh questions over how to replace Libor and its variants, the ubiquitous borrowing benchmarks set to be phased out.

Eonia, which is derived from actual overnight unsecured lending between banks, surged 12 basis points in the two days leading up to the end of November, sending the fixing to the highest since March 2016. The spike was likely exacerbated by paltry underlying volume of just 5.7 billion euros ($6.7 billion), analysts say, about a third of the average over the previous five years.

The worsening liquidity is a worry to market participants as regulators outside the U.S. look to shift toward unsecured, uncollateralized transaction-based rates as alternatives to posted benchmarks such as Libor, which have proven susceptible to manipulation. Concerns over Libor's successor flared up in July after the U.K.'s Financial Conduct Authority said it intends to stop compelling banks to submit figures that underlie the benchmark by the end of 2021, forcing governments to speed up their implementation time lines.

“Clearly regulators want something that is more robust and has more underlying transactions than” a few billion, said Mark Cabana, head of short-term interest rates at Bank of America Corp. “The Fed has said Libor is informed by less than one billion at the three-month point. There are clearly a lot of issues with these unsecured borrowing rates.”

Sudden Spike

Eonia fell to negative 0.326 percent Wednesday on volume of just 4.5 billion euros. That's after it surged to negative 0.241 percent last week, the highest in over a year. The sudden spike may have been the result of excess liquidity from a single Greek bank with higher rates than the rest of the continent, according to two bankers with knowledge of the matter, a scenario that's plausible because of the increasingly low turnover in Europe's interbank market broadly.

Eonia is derived from the total volume and average interest rate of eligible transactions by 28 European banks, according to the European Money Market Institute website. The EMMI is conducting a public consultation that involves extensive data collection and analysis of short-term unsecured transactions, which it has said will lead to changes in the Eonia methodology. The group plans to publish a report with feedback and a time line of any changes it intends to make in February 2018, according to guidelines published in July.

The European Central Bank and other European authorities are also stepping in to provide alternative benchmarks. The ECB said in September it plans to publish a new overnight rate for interbank unsecured lending among euro-area banks within three years. Moreover, the central bank, together with the Paris-based European Securities and Markets Authority and Belgium's financial-market watchdog FSMA, plan to identify a new risk-free overnight rate for the euro area that could serve as a benchmark for various financial contracts that currently rely on Euribor.

Eonia “is but a shadow of its former self, with transaction volume feeding into the calculation down 75 percent since 2015,” Credit Suisse strategists led by Praveen Korapaty said in a note published Dec. 4. “The surge higher, despite no significant market stress bolsters the case for a more robust rate and methodology.”

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Boris Korby, Jenny Paris

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