SOFR Academy welcomes publication of “EURAXI: a benchmark for Euro credit spreads” paper by University of Oxford academics

Today, SOFR Academy, a financial education and market information provider, welcomed the publication of the paper “EURAXI: a benchmark for Euro credit spreads” by leading academics Professor Rama Cont and Dr Susanna Saroyan of the University of Oxford, England.

The authors propose a methodology for constructing EURAXI, a transaction-based credit spread benchmark for Euro interest rates, which considers specific features of Euro-denominated wholesale funding. The paper examines the feasibility and benefits of implementing such an across-the-curve index for the Euro. The authors discuss the role of hedge accounting and the advantages of using such a benchmark in the framework of current benchmark reforms and in stressed conditions, in conjunction with new risk-free reference rates. Finally, the paper discusses robustness and representativeness of EURAXI in line with the International Organization of Securities Commissions principles for benchmark design and EU regulation.

Rama Cont, Chair of Mathematical Finance at the University of Oxford and co-author of the EURAXI paper said, “EURAXI is a robust transaction-based and credit-sensitive benchmark which avoids the drawbacks of previous quote-based benchmarks such as LIBOR and EURIBOR and can exist alongside the new risk-free rate benchmarks as an effective risk-management tool and reference for Euro fixed income derivatives”.

Susanna Saroyan, Senior Research Fellow at the Institute for New Economic Thinking, and the Oxford Martin School, at the University of Oxford said: “It’s crucial for financial institutions in the Euro area to be prepared and to have understandable and robust fallbacks at hand in the framework of the ongoing benchmark reforms. Though transition towards short term RFRs is advancing successfully worldwide, the design of appropriate term fallback rates still requires better understanding. I am therefore happy to contribute to this important question through my work on EURAXI.”

Marcus Burnett, CEO of SOFR Academy said, “I am very pleased about the publication of the EURAXI paper. A robustly defined Euro denominated credit spread will be helpful for Eurozone banks in an €STR-based economy and will also provide additional options for European policymakers if and when EURIBOR is discontinued. I am very grateful to Rama and Susanna, who are among the brightest academic minds in European financial markets, for lending their expertise to this important initiative.”

By construction, EURAXI reflects effective marginal funding cost and risk premia of European banks. It can be calculated under all economic conditions and adapts automatically to banks’ funding maturity structure. EURAXI can therefore coexist with €STR by complementing euro benchmark reform with a credit-sensitive and robust term index needed for efficient asset - liability risk management in the banking sector. The EURAXI design is inspired by the approach originally outlined by academics from the Stanford Graduate School of Business and the Australian National University.

The paper “EURAXI: a benchmark for Euro credit spreads” is available for download here and market participants can also register to receive updates on EURAXI developments here. Questions, comments, and feedback are welcome and should be directed to: AXI@SOFR.org.

In 2022 Invesco Indexing LLC, an independent index provider owned by global asset manager Invesco Ltd (NYSE: IVZ), partnered with SOFR Academy to launch the first-of-their-kind US-dollar Across-the-Curve Credit Spread Indices (“AXI”) and US-dollar Financial Conditions Credit Spread Indices (“FXI”). These indices work in conjunction with the Secured Overnight Financing Rate (“SOFR”) and address concerns communicated by a group of American banks. This concern was that under a SOFR-only environment in times of economic stress, the return on banks’ SOFR-linked loans would decline, while banks’ unhedged costs of funds would increase, thus creating a significant mismatch between bank assets (loans) and liabilities (borrowings). The publication of the EURAXI paper complements the Chinese AXI paper produced by academics at the Tsinghua University PBC School of Finance in Beijing, China.

About Rama Cont

Rama Cont is Professor of Mathematics and Chair of Mathematical Finance at the University of Oxford and Director of the EPSRC Centre for Doctoral Training in Mathematics of Random Systems. Rama Cont's research focuses on stochastic analysis, stochastic processes and mathematical modelling in finance, in particular the modelling of extreme market risks, liquidity risk and systemic risk and pathwise approaches in stochastic analysis. He has co-authored more than 80 research publications, including the widely cited monograph Financial Modelling with Jump Processes (2003). He was the founding director of the Columbia Centre for Financial Engineering and founding director of the CFM-Imperial Institute of Quantitative Finance from 2014 to 2018. Prof. Cont was awarded the Louis Bachelier Prize by the French Academy of Sciences in 2010 for his research on mathematical modelling in finance and the Royal Society Award for Excellence in Interdisciplinary Research in 2017 for his work on systemic risk modelling. He was elected Fellow of the Society for Industrial and Applied Mathematics (SIAM) in 2017 for his 'contributions to stochastic analysis and mathematical modelling in finance.'

About Susanna Saroyan

Susanna Saroyan is a Senior Research Fellow at the Institute for New Economic Thinking and the Oxford Martin School and an Associate Member at the Department of Economics at the University of Oxford. She holds a Ph.D. in Economics and was awarded a Marie Skłodowska-Curie Individual Fellowship. Susanna’s research focuses on monetary and financial economics, and the adoption of interdisciplinary and innovative modelling approaches in these fields. Her current research interests include the modelling and stress testing of climate risk and other non-financial risks, with the aim of capturing macro-financial linkages and feedback effects. Her broader research work addresses policy issues related to financial stability, such as the effect of unconventional monetary policies on money markets (credit and liquidity risks), or the impact of prudential reforms on bank-sovereign risk ties and money market integration in times of stress (with a focus on the Euro money markets).

About SOFR Academy

SOFR Academy is a member of the Asia Pacific Loan Market Association (APLMA), American Economic Association (AEA), the Loan Syndications and Trading Association (LSTA), the International Swaps and Derivatives Association (ISDA), the Bankers Association for Finance and Trade (BAFT) which is a wholly owned subsidiary of the American Bankers Association (ABA), the U.S. Chamber of Commerce (USCC) and Bretton Woods Committee (BWC). For more information, please visit www.SOFR.org.

SOFR Academy Disclosures

SOFR Academy supports near risk-free rates such as SOFR, €STR and the Chinese Depository-Institutions Repo Rate (DR). Over time, we also support robustly defined across-the-curve credit spread supplements such as AXI and FXI which can be used in conjunction with risk-free rates. SOFR is published by the Federal Reserve Bank of New York (The New York Fed) and is used subject to The New York Fed Terms of Use for Select Rate Data. The New York Fed has no liability for your use of the data. Neither AXI or FXI are associated with, or endorsed or sponsored by, The New York Fed, or the Federal Reserve System.

The Euro Short-Term Rate (“€STR”) calculated, maintained and published by the European Central Bank (“ECB”) on its website and via the Market Information Dissemination (“MID”) platform and the ECB’s Statistical Data Warehouse, is available free of charge subject to the ECB’s Terms of Use available at ecb.europa.eu. The ECB is the administrator of the €STR benchmark and the intellectual property owner of the “€STR” mark. The ECB has overall responsibility for providing €STR which reflects the wholesale euro unsecured overnight borrowing costs of euro area banks. The ECB has no affiliation with SOFR Academy, is in no way responsible for the potential calculation, maintenance, or publication of the EURAXI prototype and shall in no event have any liability for any use of, or reliance on, the EURAXI prototype or any data included therein. The ECB in no way guarantees the timeliness, accurateness, completeness of, or fitness for a particular purpose and accepts no liability or responsibility for any loss, damage, expense or claim (including, but not limited to any direct, indirect or consequential loss, whether or not such loss is foreseeable and whether or not the ECB has been apprised of the use to which the rate or the information will be put), however arising, from reliance on, use of or inability to use any data or information in connection with €STR. EURAXI is not associated with, or endorsed or sponsored by the ECB.

Darrell Duffie, The Adams Distinguished Professor of Management and Professor of Finance at Stanford Graduate School of Business, is a co-author of the original proposal for AXI and FXI but has no related compensation or other affiliation with its operationalization.

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