EuriBORE: the recommendations, the fat fingers, the inconsistencies ESMA (European Securities and Markets Authority) and the EBA (European Banking Authority) got together to make recommendations to the EEBF (Euribor-European Banking Federation) about Euribor. All the acronyms that start with E were there. It was quite the party, we're told. Like, the EFSF got sooo drunk and nearly bailed out the Spanish government! The ESM was seriously not amused. Anyway... The PDFs produced by the knocking of heads together include some of the usual, as well as some fun stuff that we'll get to further down. First, to paraphrase what you already know: Q: Is it a bad idea to have widely used benchmarks calculated using survey responses from banks who have an inherent conflict of interest and also have next to no governance around it? A: Yes. Q: What are we gonna do? A: Fix it. Also cut down the number of benchmarks. After all, who wants a seven month tenor? Hence this recommendation: Rates should be scaled down from 15 currently (1-3 weeks and 1-12 months) to no more than 7 (1 and 2 weeks, 1, 3, 6, 9 and 12 months) at the maximum and fewer if appropriate. Sensible. Also sensible is having some sort of solution for this: 5.1 Fat finger errors 58.The preliminary analysis of individual quotes from panel banks 1 shows that some anomalies can be found in the submissions, despite Thomson Reuters sanity checks. These anomalies can be seen as fat finger errors. For example on 12 June 2004, Bank 30 provided quotes between 44% and 55.5% for all tenors, and on 14 August 2006, the same bank provided quotes of 66% for a range of maturities (1 week to 3 weeks and 2 months to 5 months) as indicated in Chart 2. OK, who let the summer intern send the rates in? It gets better: More recently, some banks provided very different quotes from one day to the other, as evidenced in Table 1. We know what you're thinking. And yes, it did: Given that those fat finger errors passed the sanity checks, they have impacted the level of the Euribor. For example, on 10 July 2012, Bank 2 provided a quote of 1.17% instead of a more likely 0.17%. As a result, the quote was excluded from the computation of the Euribor as an outlier, resulting in a rate of 0.171%. If the error had been detected and corrected, the rate would have been 0.170% (see Table2). Thomson Reuters checked the 10 July 2012 submissions and according to the records they contacted the bank submitting the erroneous quote three times without any reply from the bank. For the quote by Bank 7 on 3 March 2009, the rate should have been 1.864% instead of 1.866%. Although the change in the rate is small in absolute value, even a small difference can have an impact on the cash flows given that many derivatives use Euribor as a reference. The impact is in the tenths of basis points. For an interest rate swap of €200m, the difference 0.2bps makes for a payment linked to 5M Euribor (don't laugh, 5M is in the above table): 150/360 * 200m * 0.00002 = €1,667. Not much extra on what should have been only €1,553,333. That, however, may have been netted against the other leg of the swap, which may itself have been not influenced by a fat finger error. Overall it's just a bit crazy that more sanity checks aren't done, and that it would ever not be possible to reach someone at a submitting bank. Another fun one is the comparison of Euribor and Euro Libor. First, they offer this reminder: Comparisons between Euribor and Euro Libor. The Libor "is the rate at which panel banks could borrow funds, by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am," while Euribor is "the rate at which Euro interbank term deposits are offered by one prime bank to another prime bank within the EMU zone." The main differences are that i) Libor refers to individual panel banks" funding conditions while Euribor refers to a "theoretical" prime bank and ii) Libor is a borrowing rate while Euribor is a lending rate, iii) Euro Libor is based on a panel of 15/16 banks against 43 banks for the Euribor and iv) Libor is computed as a trimmed average where the 25% lowest and highest quotes are excluded (i.e. based on 8 quotes), while for Euribor the trimmed average exclude the 15% lowest and highest quotes (i.e. based on around 31 quotes) and finally v) Libor requires all panel banks quotes to be computed while Euribor can be computed as soon as at least 50% of the panel banks have contributed. Got it? Now, do the methodological differences justify these differences: Even more interestingly, do they justify these differences, which are those for the panel banks who give submissions to both Euribor and Euro Libor: Well, guess it's a good thing Euro Libor isn't used all that much (from the initial discussion paper of the Wheatley Review of Libor): Though they really should stop letting the intern submit the rates. Related link: Libor, meet transaction data. Transaction data, meet Libor - FT Alphaville