Last
week, I wrote about the ongoing probe into whether investment banks
manipulated global lending rates such as EURIBOR, LIBOR and TIBOR.
Today, I would like to expand on this discussion and present some
general guidelines to understand how EURIBOR rates are set.
A. Introduction
EURIBOR
stands for Euro Interbank Offered Rate. By definition, it only
applies to one currency, the Euro. EURIBOR rates are calculated for
14 maturities, e.g. 1 week, 2 weeks as well as 1 to 12 months.
B. Calculation Process
The
process of defining the above described EURIBOR rates is set out in
the EURIBOR Code of Conduct.
The
Code of Conduct first sets the conditions that financial institutions
must meet to qualify as EURIBOR panel banks: They must not only be
active in the Euro money markets but also handle good volumes in Euro
interest rate related financial instruments. Additional criteria
include a first class credit standing, high ethical standards and an
excellent reputation.
As
of today, the EURIBOR panel includes the following financial
institutions:
EURIBOR's
Steering Committee is in charge of choosing and regularly reviewing
the constitution of the EURIBOR panel.
According
to Article 6 of the Code of Conduct, panel banks communicate “the
rates at which Euro interbank term deposits are being offered within
the EMU zone by one prime bank to another at 11.00 a.m. Brussels
time”. In addition, panel banks must also submit their
aggregate loan volume and the weighted average interest rate applied.
EURIBOR
rates are trimmed averages of the submitted data and calculated by
Thomson Reuters in a two step process:
- First, the highest and lowest 15% of all the quotes collected are eliminated.
- Second, the remaining rates are averaged and rounded to three decimal places.
Finally,
Thomson Reuters not only publishes the calculated EURIBOR rates. In
addition, it also makes all underlying quotes available to the
general public.
C. Parties
and Institutions
I. EURIBOR-EBF
EURIBOR-EBF
is an international
non-profit making association under Belgian law. It was founded in
1999.
Its members are national banking associations of the European Union
who participate in the European Banking Federation. A member can be
excluded from the association if he violates the association's legal
framework.
According
to its statutes, EURIBOR-EBF is in charge of
- developing and supporting EURIBOR;
- providing information about EURIBOR to its members and other stakeholders;
- enhance the integration of the European financial market.
EURIBOR-EBF's
internal legal structure consists of the General Assembly, the Board
of Directors, the President of the Board of Directors, the
association's Secretary General, the EURIBOR Steering Committee, and
the STEP Market Committee.
1. General
Assembly
The
General Assembly is the central organ that is responsible for
attaining the association's purpose; it is namely in charge of
changing the statutes, appointing directors, and defining the
strategy. The General Assembly consists of the association's full
members and each of them has one voting right.
2. Board
of Directors / President of the Board of Directors
The
Board of Directors is the association's executive body and consists
of at least 3 members who are appointed for 2 years. It elects its
President for a duration of 2 years. Both the President and the
Secretary General are the spokespersons of EURIBOR-EBF.
3. EURIBOR
Steering Committee
The
EURIBOR Steering Committee has been created jointly by EURIBOR-EBF
and EURIBOR ACI, both associations under Belgian Law. It controls,
supervises, and reprimands the application of the EURIBOR Code of
Conduct. Its members are 10 independent and experienced market
experts whose names are published on the EURIBOR dedicated website.
4. STEP
Market Committee
Finally,
the STEP Market Committee monitors market developments and
establishes and reviews market standards. A specific code of conduct
applies to its operations. It consists of 10 voting members of the
association. The committee is assisted by a STEP Secretariat.
II. Thomson
Reuters
Thomson
Reuters calculates and publishes EURIBOR rates.
D. Comment
In
my last week's comment on the LIBOR rate fixing, I criticized the
unclear legal structure that surrounds the LIBOR fixing. However,
this critic does not apply to the EURIBOR fixing process: Not only
does EURIBOR-EBF dispose a clearly defined legal status as it is an
association under Belgian Law. In addition, the relevant
constitutional documents of this association are published on the
below mentioned website leaving no doubt as to how EURIBOR-EBF's
internal structure looks like and how it might be modified, if
required.
Resources:
- http://www.euribor-ebf.eu/
- EURIBOR-EBF statutes and other constitutional documents
