This month, the STOXX® GC Pooling EUR Deferred Funding Rate (GC Pooling Deferred), a benchmark of overnight borrowing costs in Europe, turned five years old, as did the full STOXX GC Pooling money market curve.
The period has seen the family of rates establish itself as a reliable reference in Europe’s money markets, reflecting the steady evolution of the repo market. In fact, today the vast majority of interbank lending is executed in the short-term collateralized, or secured, market. The STOXX GC Pooling Indices exhibit constantly available liquidity even in the longer-term tenors, where daily activity has risen to virtually all year round.
The anniversary comes at a crucial time as regulators seek to reform benchmark rates for money markets, with secured-market indices having emerged as the preferred option in several parts of the world.
The historical benchmarks Euribor and LIBOR suffered from dwindling underlying volumes in the aftermath of the global financial crisis – and received a fatal blow when their declarative approach to rate setting was determined to have led to manipulation. Eonia, the unsecured euro overnight average and long-established risk-free rate (RFR), is also being discontinued on concern a falling number of submissions means the rate may no longer reflect true funding costs.
“The European money markets are about to fundamentally change, and we want to help participants during the transition phase and beyond,” said Yuliyan Georgiev, Fixed Income Director at STOXX. “The GC Pooling index suite can help make the transition to the new RFR simple and easy.”
The repo market
Established in July 2001, Eurex Repo is a highly liquid marketplace that benefits from anonymous and low-cost trading and clearing through a central counterparty. The GC Pooling market is the segment for cash-driven secured funding and offers different predefined general-collateral (GC) baskets for trading, covering around 14,000 instruments eligible as collateral by the ECB.
GC Pooling Deferred is a robust representation of actual one-day GC transactions in euros. Since its launch, the index has referenced an average daily traded volume of 25.1 billion euros.
The introduction in October 2013 of 14 new price and volume STOXX GC Pooling Indices expanded the family to cover the full money market curve along seven tenors, from 1 week to 12 months. The whole maturity curve has offered stable liquidity in the past five years, even as the extraordinary monetary operations and lending facilities of the European Central Bank (ECB) has driven a share of volumes away from the repo market. An average daily volume of 2.2 billion euros has traded for the 1-week segment in the past five years, and 325 million euros for the 12-month term.
So far this year, there has been trading in contracts on the 1-month to 12-month maturities in 98% of all sessions. That’s the highest ratio for each term segment since data starts in 2013.
Consultation on new rates
The ECB this year conducted a market consultation to assess three candidate euro overnight rates as alternatives to Eonia. The euro short-term rate (ESTER), a new unsecured rate produced by the ECB, and GC Pooling Deferred were two of the rates put up for consideration.
On Sep. 13 the regulators’ group working on a new RFR recommended ESTER. The ECB will begin publishing ESTER by October 2019, only three months before it is scheduled to replace Eonia when the new EU Benchmarks Regulation kicks in on Jan. 1, 2020. The transition timeline is further complicated by both legal and technical factors, including the time needed to build term rates if they are to be derived from the new RFR.
An established and solid secured alternative to ESTER will continue to play a role either as a key rate in the transition period, or as a fallback rate in case of exceptional events later on. GC Pooling Deferred has a high correlation to Eonia and ESTER, and the smallest spread to Eonia among the three candidate rates considered in the ECB consultation. This means it would present the lowest transition cost from Eonia. The index has eight years of daily pricing data, while cash-settled futures tracking it have been listed since 2014.
“With five years’ experience in providing transparency to markets, our indices have added a lot of value and can continue to do so after the Benchmarks Regulation kicks in,” said Georgiev.
A reliable rate for a crisis-prone region
Repo contracts volumes spiked after the global financial crisis, as creditors sought the relative safety of collateral. This is proof of how valuable the repo-based market is during stress periods, when a viable and reliable RFR is needed the most. While volumes in collateralized markets may decline in times of calm, they tend to escape the gaps seen in the unsecured segment.
A rate for a solid money market
Money markets are a real bloodline for companies, borrowers and dealers of bonds and derivatives. Every day, thousands of participants seeking the transparency and reliability that strong financial markets require turn to the secured lending segment and its corresponding rules-based rates. STOXX will build on the experience of the past five years to continue making the GC Pooling Indices the reference rates for the broad money markets in Europe.
