So we go on with our panel on IONIA transition. Just let me add one clarification to a question that came from the back, just to make it very clear. Ester is an overnight rate, just as IONIA was an overnight rate. So any issues of credit spreads and credit spreads varying over time, that's of course a question more of the term rate, as the person also indicated, and that's something

we will discuss more in the afternoon. So it has nothing to do with Ester, but more with the development of term rates. So let us speak on the Ester transition. Before we start, just to let you know, we have also planned for questions and answer

sessions, and for that I would like you to prepare, because we would do it online. So everybody who has a mobile phone with you, you can log on to this website, www.menti.com, and then indicate the code that I hope you can read from all sides.

So if you have any questions to the panel, please collect these questions. You can type them in there on this website, and at the end of the panel, we will then take up these questions. A colleague of mine will collect them and then read them out to us, yeah? So just let you know that you start preparing now, maybe with your phones, that you can

put the questions there. So as we have heard before, probably the transition from IONIA to Ester is one of the more pressing issues that the working group and the financial industry has to deal with right now, in particular due to the deadline of the benchmark regulation of 1st of January 2020, whereas the usage

of IONIA will be restricted unless we have a postponement of this rule. So let me introduce you the panelists. So we have Jaap Kees from ING. He is supporting the chairman in his group, so he is a member of our working group on risk-free rates. We have Alberto Lopez, who is a senior benchmark officer from EMI, the European Money Market

Institute, so the administrator of IONIA and EuRiber, who will recall the IONIA reform and also talk about the role of EMI going forward in the transition process. And then we have Carlos Molinas, who is global head of business compliance at Grédia Recol,

and his institution leads the substream of the working group that deals with the transition of IONIA. So I would ask Alberto to start with your presentation. Thank you. Thank you, Coelhoia. So I would like to – my presentation will tackle the background as to why we are here

and why all the work of the EURFR working group was necessary, and also try to walk you through why we ended up communicating to the market that we would not pursue the

IONIA reform. So it is – I think it is important to highlight that the IONIA is a major reference rate for the European many markets. It seeks to represent the rate at which banks of some financial standing in the European Union and the EFTA lend funds in the overnight interbank money markets in Europe.

It is worth emphasizing that there is a lending component. So other rates, like ESTR or the Euro rate, are borrowing rates. So EMI is the administrator of the IONIA benchmark, and the ECB acts as its calculation agent.

It is fully transaction-based. It's a fully transaction-based benchmark, and it's currently calculated from the contributions of a panel of 28 credit institutions across the EU. Its use is broad, as you know, so it stands as the principal credit risk-free reference rate in the Euro-denominated interest rate derivatives markets.

And as was mentioned before, for long it was considered a robust and viable benchmark rate, supported by a robust governance framework. So since it was determined on the basis of execute transactions, it already conformed broadly with international best practices. So in 2016, seeking to enhance the index's governance and align it with the requirements

of the benchmark regulation, EMI launched the IONIA review. As part of this program, EMI also intended to review and enhance IONIA's methodology in view of some shortcomings that we had historically observed, and I would like to

walk you through this because I think it's important to understand why we are where we are. So as you can see here, IONIA volumes have decreased since after the crisis years. So in the early 2000s, volumes never fell below 32 billion, increasing up to an average

of almost 48 during 2007 and 2008. Since 2009, however, the average yearly volumes have gradually declined to about 7 billion euro in 2017. During the first half of 2018, the average IONIA volume was of 4.7 billion euro.

On the 31st of October, 2018, so just a few days ago, IONIA was published on the basis of an underlying activity of 488 million euro. So it is necessary to highlight, it's important to highlight, that IONIA does represent accurately

the market that it intends to measure. So the current monetary policy environment, along with other macroprudential measures, does not encourage and secure short-term lending between banks. So just some evidence of this.

According to the ECB, so on the left, you have a chart that was published by the ECB in their first consultation on Esther, and there was a statement there. So it was a study of the size of the unsecured overnight money market based on target two

data, and it said that volumes stood on average at 6 billion euro in September 2017. IONIA's average underlying volume in that same month was of 7.2 billion. So what you can observe in these charts is that from June 2015 onwards, the contraction in the market become more apparent, and IONIA seems to capture the majority of the traded

volume. In November, so far there's evidence with respect to IONIA's representativeness of the market. In November 2017, the ECB started publishing statistics on the underlying market based

on the data gathered in the context of the MMSR, as Pascal mentioned. So that's the same data that will be used as a basis for building or for calculating Esther. The MSR statistics allow EMI to assess the representativeness of the benchmark, and just

by comparing the volumes with the activity, so the IONIA volumes with the activity that was captured or that is reported by the ECB on a frequent basis. Also taking into account that the IONIA panel does contain seven banks that do not have reporting obligations under the MMSR. What we could observe is that the IONIA panel captured about 80 percent of the MMSR overnight

interbank lending activity in 2017. So if we go back to this slide, so I would like to, I mean, raise your attention to the concentration of the rate. So this limited market activity has been mirrored by an increase in the concentration

of the underpinning volumes in a very limited number of IONIA contributors. So if we look at the period between 1999 and 2009, approximately 51 percent of the

total daily volume, the total IONIA daily volume, was reported by the top five most active banks in the panel. Between 2010 and 2015, the average increased to 72 percent, and in 2017, about 88 percent of the volume was reported by the top five contributors.

So IONIA is becoming a very concentrated benchmark. So if we look at the number of IONIA contributors that submit, because, so these 28 banks, on a daily basis, they do report their volumes and their volume-weighted average rate of

all the trades that they've had over the day, regardless of whether they had activity or not, they do report their lack or activity otherwise. And so what we have here is a representation of the non-zero volumes.

So what we can see is that the IONIA contributors which submit non-zero volumes, so the number, has decreased significantly in the past few years. So between 2004 and 2009, so that would be the top chart, approximately 69 percent of IONIA contributors made non-zero contributions towards the index, and in 2017, so the most

recent data that we have there, yearly averages, 38 percent reported on a daily basis overnight unsecured interbank lending activity.

So these trends, again, should not be surprising, because they were already somewhat reported by the ECB in the press consultation on Esther. So this decrease in the number of IONIA panel banks has, of course, been reflected in the decrease in the number of countries represented in the rate, and that would be the bottom chart.

So what you can see is that, so it would be the blue line, and what you can see is that in 2018, so in this year, in the beginning of this year, the number of countries represented by the rate, or at least with non-zero submissions, has decreased, and it

stands at between five and four. So in view of the observed participation in geographical concentration, and also given, so taking into account the perceived lack of appetite for, so the market's lack of

appetite for a fully-fledged IONIA review, on the first of February 2018, this year, we communicated on our intentions to stop any efforts related to the alignment of the IONIA index with the requirements of the BMR. So in particular, as it was mentioned before, we highlighted that through conditions and

dynamics of the unsecured segment of the money market remained unchanged, IONIA's compliance with the EU BMR by January 2020, that is the deadline that the regulation imposes, could not be warranted. So the work of the EUR RFR working group since the first meeting, and over the last

few months, so the first meeting in February and over the last few months, has been intense. EMI has collaborated, providing its expertise as administrator of two of the four critical benchmarks declared by the European Commission.

Now following the identification of ESTER as the recommended alternative reference rate to IONIA, we stand ready to support the market in the transition towards the new risk-free rate, and it must be clear that we intend to continue with the publication of IONIA for as long as the stability of the panel of contributors continues, and

until the market considers that it's necessary. Thanks very much. So then we hand over to Carlos Molina. So there was already a question on how to deal with a nine basis points spread between

ESTER and IONIA. I suppose you can also say something about this in your presentation. Sure. Thank you, Cornelia. First of all, it's an honour of privileges personally as a representative of group critical to be here, and thanks Alberto for this introduction to the rate. So I'm going to start moving, because I'm from Barcelona, and as you know, in Barcelona,

we have La Ramblas, which is a great place for people like me to move up and down and down and up just to make sure that I deliver the right message. So I'm the chair of subgroup four, and subgroup four is a great group, more intelligent

and far more intelligent than me, which is a great institution to be. And I will try to explain what the situation of our thought right now on the SD4. A lot of things are not set in stone, a lot of things they are projections, this is what we intend, but we're conscious of transparency, we want to be as transparent as possible,

and the deadlines are very short. So we want you to be informed of what is our line of thought. So the agenda is going to be describing, we have to move from one side to the other. So the best case scenario, where are we today, the objectives and challenges of the subgroup

four, from A to B, Eonia to Esther, the gap analysis and the potential transition paths, and the next steps and actions for the subgroup four. So I would like you to imagine that this transition is like from moving from one boat to another boat. So we have the boat, we are all together in the boat called Aonia, and we have to move

to another boat, which is called Esther. So this boat we know Alberto just said is sinking, so it stays like it is. And the new boat, we know more or less how it works, because the ECB has told us, but it's not yet there. So we have to move, so no pressure.

So we have the best case scenario as of today. We know that Aonia is used as a reference for floating payments in derivatives and cash products, but as well it's used as an OAS curve for discounting the value of the future cash flows. This is very important. Legacy books, or called bag books, they are alive, they are dynamic, they generate

cash flows, future cash flows. And this is not Aonia books, but Euarbor books, and these cash flows, they are most of them valued using OAS. And I ask, guess what, use Aonia. So we depend on this curve, not only for the bag book, but for the future book, not only

for the OAS book, but as well for the Euarbor books. As the 1st of January, Aonia in its current form, if it stays as it is, it will not be Euarbor compliant. So if Aonia stays as it is, the worst case scenario is that Aonia will be prohibited

for new contracts and for legacy books as the 1st of January 2020. And the best case scenario is that FSMA decides that it will be only prohibited for the future usage. So the question is, can you value your legacy books and the cash flows from your legacy

books using a curve that you are prohibited to use? I'm ahead of compliance. If I was ahead of risk, I would say no. You cannot use a curve that is not liquid to value future cash flows. So our best case scenario, if we stay as it is, is catastrophic. I mean, liquidity in Aonia OAS will disappear due to BMR prohibition and valuation and

risk management for these future cash flows coming from any book will be impaired. So what are the objectives and challenges for the subgroup 4? So do nothing is by far the worst course of action.

So if we do nothing, we hit a wall. So we're in a car, we're driving 120 kilometers an hour, there is a wall there. And we know the brakes are not enough. So we have to steer right or left. So we have to do something. Do something involves risk. So if we steer right or left, we may have an accident.

We can hit somebody, but we have to do something. And this risk depends on how radical the transition path is. So the market needs to move from a non-sustainable benchmark to a sustainable benchmark as per the 1st of January 2020. And we are committed to give a solution before the 1st of January 2020.

So identify, recommend and communicate a transition path from Ionia to Esther as smooth as possible that protects market integrity and is the fairest to all benchmark users.

So if we want to go from one boat to another boat, the first thing that you have to do is to measure what is the distance between the two boats and what is the difference between the boat that you are in and the boat you are moving to. So we have Ionia, the boat we are in, we have to move to Esther. So amazingly, so we have to look at the difference and what are the similarities.

They start with an E, that's great. Why? Because they are Euro rates. That's great. I feel happy now. Ionia is overnight rate, great. Esther is overnight. I feel even better now.

Ionia is unsecured, whatever that means, and Esther is unsecured as well. So I feel quite good now. It's transaction-based. Esther is transaction-based. Wow. We have Ionia as an unstable panel. So the panel has been going down as my gray cells in my brain.

So it goes down by the time. And Esther is an unstable panel because it depends on regulatory data, which is great. So Ionia has a narrow panel, Esther has a wider panel. So now I not only feel good, I feel really optimistic.

Very optimistic. But there is always, always a fly in the ointment. So Ionia is bank lending. Esther is bank borrowing. So there is a difference. It has to be different because, as everyone in this room, we have to make money. And then we're at the ECB.

So every time the banks, they do something, we have capital charges. So between bank lending and bank borrowing, there is a difference. It has to be. And then last but not least, Ionia is published on T and Esther is published on T plus one. That's a very important one. So I don't want to paraphrase the George Bush administration, but you have no knowns, no unknowns, and unknowns.

So one of the known knowns is that it's going to be published on T plus one. So be prepared. That's the message. The future is T plus one. So be careful with your systems, be careful with the way that you're calculating things. So in the future, the future is T plus one, not T.

Okay, so that's a complicated one. And I apologize because it's going to be quite complex. But I will get you to a road that we are following on the SG4. So the key question is to determine suitable Ionia-Ester transition path. So we have to identify what are the different paths that are available to us.

So I don't know if you have long drives with your kids, but I have this game and to the kids, they imagine an animal and then we ask questions, you know, has four legs, is a mammal, etc. And we have to define what is what is the animal, so it's a dog or it's a cow. So here's the same. We're going to ask questions to define what are the transition paths that are available to us.

So first question, will Ionia-Ester published in parallel or will Ester succeed Ionia beyond the BMR transition date? So do we want the two boats to navigate together or do we want one boat to disappear and the other one to appear at the same time for everybody to move?

Will Ionia-Ester be independent rates or will the methodology of Ionia evolve to become independent on Ester beyond the BMR transition date? This is a long question, but again, in the similarity of the boats, do we want to have a distance that is measurable and is constant or we want an instance that is going to move?

Of course, if it's moving, it's going to be more difficult for us to jump. If it's fixed, we know what is the distance we can calculate, how to move from one to the other. And then, can an Ionia-Ester spread smoothing the transition? Do we have to have a distance that is set up in stone?

And can Ionia-OES and Ester-OES discounting curves co-exist? That's a good question because if we have two boats, if we have two curves, these two curves can be used for discounting the cash flows. So do we allow for these two discounting curves or use only one?

So we have to keep in mind that the end of the BMR transition period is the first of January 2020, and we have to go from A to B before the first of January 2020. Okay, so here we go to the transition path. So asking those questions, we're going to analyze how many paths we have.

So an Ionia-Ester relationship beyond BMR compliance, we want a relationship with them. We want these two boats to stay. So we want to be independent. So both boats are moving. We know, do we want a parallel publication? We can say it's necessary because the two boats will co-exist, so they have to be published.

Do we want a spread? This question is not applicable. Do we want a parallel discounting? If we want a parallel discounting, we go to parallel run approaches. This is the ARC-based transition plan. This is the US. They're moving from LIBOR to SOFR. SOFR is very different. This boat is moving a lot.

The distance is quite big, and it's moving, so they need time, the time to move. Do we want, we don't want parallel discounting, so we can contract alternative approaches, and we go to the Swiss market transition. The Swiss market transition, they did more or less the same as US,

but they decided one day they will move from one boat to another boat. They did that. Why? Because there's not many people in the boat, and it's quite concentrated. Can we do the same with the Euro? I'm not sure. We have far more people in Ionia than we have in toys. Second, the question has to be dependent relationship.

Do we want these two ships to be dependent? Do we want a parallel publication? If we don't want a parallel publication, do we want a spread? We don't want a spread. We want parallel discounting. It's not applicable. This is a pure succession. It's like a king abdicates,

and then we have the prince taking over of the kingdom ship. So this is the UK market transition. So there is, they say, you know, they're very cunning in UK. They said, we're going to change the name of the boat. So it's going to be Reform Sonia, and there is no need actually to move because this boat is not going to be much better.

Then we go back, and we say that Ester and Ion are dependent. There is a parallel publication. We have a parallel publication, and they're both dependent. Do we want a spread? Big question. Do we want a separation? We want the distance that has to be fixed and frozen between the two ships.

We say yes. Let's freeze so then we can measure the size of the jump. And do we want parallel discounting? We can say yes, recalibration. We call spread dual discounting. Or no, we're going to use one single curve to discount all the cash flows.

And then we call it recalibration spread clean discounting. Those are two potential transition paths, two more paths that we have. So we have one, two, three, four, five paths. We go back and we say, we want the spread between Ester and Ion. We say no, we don't want the spread. They are the same thing.

We want a parallel discounting. Not applicable because we say Ester is equal to Ion. So we call it the recalibration, no spread. And then there are two, finally, there are two other ones that they do not exist for completeness. I just put it on because we said we want, we don't want parallel publication but we want parallel discounting.

It doesn't make many sense. So again, think about it. It took me an hour of my time to understand all of this. So I don't expect to understand right now everything but have a look. And if you find another path, please let us know. Fine, last but not least, what the envisage next steps.

And then again, this is not written, it's not in stone. That can change, but for, we want to be transparent. So as the 1st of December, 2018, the SG4 agrees and presents its report to the main work stream. The main work stream, the euro risk-free rate, endorses these recommendations.

And again, we are a group of experts that we are recommending. We are not executing. We are recommending. Then by COVID-19, we consider the potential market feedback. And again, be careful because the deadlines are so tight that they will have very short period of time

to answer the questions that we will ask. And it's going to be, unfortunately, during the Christmas period, so be preventative. If we do this, it's going to be a very short time. And then the recipients of the recommendations, they will perform the evolutions, which may involve, again, public consultation,

but formal public consultations. Then Esther starts getting published on Q3, 2019, and the transition achieved before the 1st of January, 2020. And here's the finish of my presentation. Thank you. Thank you, Paolo.

Yeah, maybe to allow for some time to collate the questions, maybe a short wrap-up of both sessions. So I think Carlos made quite clear that Aonia's lifetime is ending, quite an exciting lifetime, but now I think volumes and concentration are big problems,

so we need to find a solution. And there, of course, Carlos is working on. I think it's important to note that Aonia is not only used in short-dated cash instruments or in short-dated derivatives, it's also used in very long-dated derivatives for their outstanding contracts that go years beyond the 2020 deadline. And it's important to note

that also Aonia is used for valuation purposes across the industry for derivatives, but also for insurance companies, for example, on their liability base. So it's a very important benchmark. The best-case scenario, as Carlos already explained, is that we can still use Aonia for legacy contracts,

but no longer for new contracts after 2020, but it's still a very challenging and actually a catastrophic scenario because we can't simply rely on a benchmark that we can no longer use. So we need to move, we need to act, and I think everybody should realize it also in our companies, we need to act. It's not only the working group

working on some replacements, but also in the industry, in the market participants. Yeah, we need to work on our systems, we need to work on our processes, and that will be a big task. Important questions we still face. Do we need a transition? I think, yeah, the answer is actually yes.

Do we need it directly, or do we need it over certain periods? What is the SPED methodology? We will come out and share our analysis, and hopefully we will receive some feedback from you. There's still a lot of work to be done, that's clear. I think it's also a good conclusion would be that the task is very complex, the stakes are extremely high, and time is short.

So it's a big challenge. Okay, so I hope that you have gathered some questions and put them into this Mentimeter survey. My colleague, Philip, who would then, Philip Mulito, also from the DG Market operations, would then start reading out

some of the questions to the panel. Do you, I do have a microphone. Everybody, so I would like to thank 32 participants who have submitted questions, still questions coming in. Some relate still to the session before. I would like to point them to our website for additional information on Esther.

Some participants are impatient and ask questions on the following section. So I would like to concentrate on two themes that came up here. One is on how the panelists, what type of legal instruments they see could be used for supporting a change from Ionia to Esther.

What you see, the likelihood of that happening, and whether that would be your preference. And I think the second question relates to a possible Ionia defined as Esther plus a spread, whether that would require an authorization or would automatically be BMR compliant.

Thank you. Yes, do you want to take the floor, Carlos? Yeah, I can, I can answer the first one, the legal instruments. I mean, legal instruments is quite vague. So what we're trying to do is to use,

to avoid as much as possible the lawyers. So that's a good idea. Sorry if you're the lawyers in the room, but we're trying to avoid fallback, to use the fallback provisions. The fallback provisions are an instrument that is a red button that you have to push

only in case of an emergency. What we're trying to do is to make an evolution of the current Ionia to make it BMR compliant. So that's what we're trying to do. This is our aim and our objective. If you guys, you have to use the provisions of the fallback or you have to use prepapering. So that will not be success for us.

So our group intends to have a smooth transition, as smooth as possible. And the second one is that whether an authorization will help, sure. I mean, an authorization for the new Ionia, if the decision is to reform the Ionia,

will be very helpful. It will be very helpful because it will endorse actually the new methodology. It will make it clear for everyone, for the users and the producer and the administrator of the benchmark to make a smooth transition. So this is a key element as well

if we go for that particular path for moving from one boat to another. We need to know that the new boat and the new ship is authorized and is supervised by a supervisor. Yeah? So with regards to the authorization,

so EMI, so the authorization comes from the public sector and in the case of EMI is the built-in FSMA. So it is something that we are discussing with them and whether we would actually require

to apply for authorization. But in any case, it has to be emphasized that the whole idea of this smooth transition is for the market to have time to transition. So it should not be taken, so if EMI were to redefine Ionia as a spread to Esther,

it is not as a means for the market to keep on using Ionia as it was. So it is for the market to actually have time to transition to the new rate. So you should not expect Ionia to be there forever. Yeah, and I think the working group

will of course take the initiative, but we will work closely together with also the EC, with the ECB, with FSMA, with ESMA to do this really in a concerted way. And yeah, there is probably no risk scenario. The whole full legal means to enforce this are not available. I think if we do this in full transparency and also in a full concerted way,

we should be successful. That's the idea. Philip, are there further questions? I think there would be one other. And it's the question, will Ionia and Esther be published in parallel or will Esther succeed Ionia beyond the BMR transition date?

That's again is a known and known. So we're thinking about which one is better. So we have establishing right now what is the criteria that we will use to establish which is the best path. So if one stops being published

and the new one is getting published, it's got some pros and cons. So the pros are obviously the disclarity. We know where we go. The cons is that some people may not know that the first one is going to disappear. So especially consumers and people that they are less sophisticated may sink with the first vote and not knowing that they have to move to the new one.

So there's plenty of things that we are considering. We're establishing what is the criteria that we have to use to determine what is the best path. Again, not clear, but it's known and known. We are working on it. And again, if you have any questions and you want to raise questions,

you know that our minutes are published. We're very transparent. And again, the group is still open, especially for people that they are the users and the consumers. Philip. There are questions coming in,

but they relate a lot to the future on Esther and new monetary policy environment. I think those we cannot tackle here either or we already said that it is not known. So I think from the topics that I see here, we have covered everything. Okay, thank you very much.

So for the afternoon session where we will talk about term rates, we will have another question and answer session. So then I understand some of the questions that came in already, we can then better tackle in that environment. So yeah, so as Carlos outlined, there will be a public consultation once the working group has a recommendation.

So I would also invite everybody to look at that then carefully once it comes out. And if you have new ideas, thoughts, to also participate in this consultation. And do you have any other concluding words? Kind of a new job, but- Yeah, I think it's very important to reiterate that it's not only the working group

that is now doing this work. So we are trying to find a replacement benchmark for Aonia, but it's also try to start already within your companies to look, okay, inventorize where do I use Aonia, which kind of products, which kind of processes, it's in valuation, it's in risk management, it's in hedge accounting, it's financial accounting.

Yeah, we have to be ready for something that we don't know the outcome for, but at least we need to do the preparations within the financial industry, and we have to start with that. And it's a difficult one because you don't know the final outcome, but we don't have the luxury to still sit and wait. So that is, I think, an important message we need to get.

Okay, if there are no further questions on this topic, then I would suggest that we break for lunch. So we have time until 2 p.m. Lunch will be served outside here on the balcony, so you will go to the right-hand side.

Yes, so please enjoy our beautiful building.