(Bloomberg) --
The European Central Bank signaled to banks that the ball is now in their court to make sure the transition to a new lending benchmark interest rate goes smoothly.
Executive Board member Benoit Coeure told a meeting of market participants on Wednesday that his institution was ready to start publishing of the ECB's euro short-term rate, or ESTR, on Oct. 2 as planned. The new unsecured rate is part of an attempt by regulators to shift the market away from the traditional Euribor and Eonia gauges.
“Internal preparation of the launch of the ESTR is completed,” he said at a round table meeting on euro risk-free rates at the central bank's Frankfurt headquarters.
The ECB last week conducted the first stress test of the benchmark after it cut the deposit rate by 10 basis points and it was effective, according to Coeure, who runs the ECB's market operations.
“We were all glad to see that ESTR responded exactly as expected and the cut was fully priced through, that is ESTR was down by 11 basis points,” he said. “So we have a very smooth and stable money market which is very nice to see.”
The switch comes as similar moves are taking place in the sterling and dollar markets, after a rigging scandal undermined confidence in rates indexes used as benchmarks for roughly $370 trillion of financial products worldwide. ESTR is catching on fast -- Germany's L-Bank last week priced the first sale of syndicated notes tied to the ECB's new benchmark.
Coeure urged participants to move swiftly with the switch and ensure they have contingency plans in place as the market moves past the sell-by date for the current benchmarks. There will still be some 13.7 trillion euros of notional amount of contracts tied to Eonia after Oct. 2 and 3.7 trillion euros will remain outstanding even after 2022, he said.
“Market participants should exercise special care for the latter contracts so that they are either closed out in time or renegotiated based on the ESTR as recommended by the working group,” Coeure said. “The launch of ESTR next week means that the clock is ticking.”
To contact the reporters on this story: Yuko Takeo in Frankfurt at ytakeo2@bloomberg.net;Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Zoe Schneeweiss, Brian Swint
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