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New euro overnight interest rate by 2020

The European Central Bank (ECB) has announced it will develop a new euro unsecured overnight interest rate by 2020, which will complement existing benchmark rates produced by the private sector and serve as a backstop to private sector benchmark rates. Overnight benchmark interest rates are important for financial markets and monetary policy implementation.

The rate will be based on data already available to the Eurosystem and would complement existing benchmark rates produced by the private sector and serve as a backstop reference rate. According to the ECB, the interest rate will be based entirely on transactions in euro that are reported by banks in accordance with the ECB’s money market statistical reporting (MMSR).

In its statement, the ECB said: “Interest rate benchmarks are currently undergoing in-depth reforms. The ECB decided to take action as benchmark rates have an important anchoring role for contracts in financial markets.”

It described the new rate as "a 'risk-free overnight rate', which can serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area".

It added that it intends to provide more information on money market activity in order to enhance market transparency. Specifically, it will release aggregated rate and volume data based on MMSR data for various money market segments and tenors. The purpose of such regular publications will be to enhance market transparency and therefore improve money market functioning.

The next step in developing the euro unsecured overnight rate will be to communicate the features of the new overnight interest rate to market participants and then hold a market consultation during 2018.

This item appears in the following sections:
Investing Short-Medium Term Surpluses
Money Market Fund Investing

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