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Senior market participants across the buyside and the sellside are confident they will be ready for the shift from Eonia to €STR but less than half of respondents believed that Libor would definitely end in 2021, a study from Acuiti has found.
Libor, the benchmark interest rate which underpins an estimated $350tr in financial instruments, is expected to cease being published at the end of 2021.
While Libor is the most significant, a host of other “Ibor” benchmarks across the major financial jurisdictions are being transferred to new rates.
This month, the European Central Bank began publishing the Euro short-term rate, €STR, the new overnight unsecured rate that will replace Eonia. €STR is based on unsecured overnight borrowing deposit transactions.
In September, Acuiti surveyed senior executives across the buyside and the sellside on their levels of preparedness for the transition away from Libor and other regional Ibors.
Both the buyside and the sellside believed that a transition to €STR would be achievable by the end of 2021 with 53% of sellside and 43% of buyside respondents said a transition was definitely possible while only 14% and 18% respectively said it wouldn’t be achievable.
The transition from Eonia to €STR is significantly less complex than the transition away from Libor, owing to the much smaller notional and breadth of instruments that use it as a benchmark.
The survey found that less than half of respondents believed that Libor would end as a reference rate by the end of 2021.
In terms of the transition away from Libor, 67% of buyside respondents had begun active work on the transition, compared with 63% of respondents from the sellside, with brokerage firms lagging behind banks in their preparations.
For those that were not well advanced in preparations, a lack of development of market infrastructure was cited as the major factor holding firms back for both the buy and sellside.
For the sellside, issues with internal systems was also a major factor (particularly for tier 2 and 3 banks) as firms need to recalibrate internal IT systems and develop new internal finance pricing models to reflect the new rates as well as working with clients to ensure contracts and fallbacks accommodate the transition.
“Our report found that there remains a number of hurdles to be overcome before firms are ready for the transition away from Ibors,” said Will Mitting, managing director of Acuiti.
“Developing liquidity in instruments linked to the new rate and establishing term structures and processes around fallbacks is essential to enabling the transition in the timescale set out by regulators.”
To download a copy of the report, click here.
