SOFR Academy has issued a Request for Proposal (RFP) for a Vendor to Publish and Administer European Across-the-Curve Credit Spread Indices (EURAXI) which work in conjunction with the Euro short-term rate (€STR)
Since the 2007-2008 financial crisis, large banks have responded to market and regulatory pressures to increase stable funding by significantly changing their funding structures. Underlying the decline in many banks’ share of wholesale funding has been a cutback in the use of short-term funding and a contraction in interbank liabilities.
In Europe, members of the European Central Bank’s (ECB) Money Market Contact Group (MMCG) have noted that the robustness of Euribor as a benchmark index has been suffering in general and acknowledged in particular that maturities up to three months adjusted sluggishly to rate changes, owing to methodological features of the Euribor calculations but also reflecting that banks avoided accepting unsecured deposits at maturities that did not confer any benefit in terms of liquidity regulation.
In 2023, SOFR Academy, Inc. (SOFR Academy) commissioned a European AXI (EURAXITM) feasibility study which was authored by two leading academics at the University of Oxford, England. The White Paper lays out the framework for across-the-curve credit spread indices for the European market, which reflect the average funding costs for European major commercial banks and can serve as references for credit pricing and risk management. EURAXI is a transaction-based credit spread benchmark for Euro interest rates, which takes into account specific features of the Euro-denominated wholesale funding.
Having reviewed the EURAXITM feasibility study, SOFR Academy, University of Oxford academics, and other noteworthy academics with requisite benchmark design experience believe that a European AXI can be produced in alignment the highest international standards for the construction, publication, and administration of financial benchmarks. SOFR Academy seeks an experienced vendor to publish and administer EURAXITM and its extension, the EUR Financial Conditions Credit Spread Index (EUR-FXI) which follows the same methodology as AXI, but with underlying transactions expanded beyond banks to include all financial institutions as well as corporate funding transactions. The intention is that EURAXITM and EUR-FXI will be made available only as spreads to the Euro short-term rate (€STR). The advantage of this approach is that financial instruments linked to EURAXITM and EUR-FXI can trade independently thus ensuring that market liquidity is not diverted from €STR.
Using the methodology and data sources proposed by the University of Oxford academics, EURAXITM and EUR-FXI should be calculated and published on a daily basis. Maturities should include 1-month, 3-month, 6-month and 1-year as well as the unscaled raw indices. The EURAXITM benchmark administrator should make the published data available to other market data vendors and publishers at reasonable cost.
EURAXITM and EUR-FXI should be published to the highest possible international standards of transparency. For both the long-term and short-term components, the EURAXITM benchmark administrator should publish underlying statistical data on a daily basis including but not limited to the number of underlying transactions, the notional volume (in Euro) of underlying transactions and the weighted average maturity of each component (in years). The EURAXITM benchmark administrator should publish detailed methodology documentation as well as information that enables users to obtain samples of input data. In the event that input data is expanded to include transactions from a European Union consolidated tape (CP) and that the CP provider implements reporting dissemination caps under the supervision of the European Securities and Markets Authority (ESMA), the EURAXITM benchmark administrator should publish a ratio of the capped-to-uncapped data so that users can quantify the larger uncapped contemporaneous transaction volumes.
The EURAXITM benchmark administrator should consider and clearly disclose how they have considered applying the “concept of proportionality” to safeguard market integrity and financial stability. In connection with this, consideration should be given to the relative size of the underlying market in relation to the volume of trading in the market that references the benchmark taking into account specific features of Euro-denominated wholesale funding market dynamics. This analysis should be undertaken separately for EURAXITM and EUR-FXI.
Interested firms should submit responses in writing to SOFR Academy at [email protected] by October 31, 2023. SOFR Academy will evaluate responses in consultation with University of Oxford academics and may require selected firms to present their proposals. Following SOFR Academy selection, the name of the identified administrator will be published. The administrator should be prepared to begin publication of EURAXITM and EUR-FXI on or around June 30, 2024 (forward-looking term rates at standard money market tenors in addition to the raw unscaled indices).
[Download the RFP document]
