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European Central Bank to develop overnight unsecured rate for eurozone

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The European Central Bank will provide a new overnight unsecured rate for the eurozone before 2020, Europe's central banks said in a statement Thursday.

An overnight rate will serve as a basis for an alternative to current benchmarks used to price financial instruments and contracts in the eurozone.

The decision by the bank came weeks after the U.K. Financial Conduct Authority announced its decision to end LIBOR, a crucial rate used to determine the value of transactions such as futures contracts, interest rate swaps and other financial instruments, and an intention to replace it with the sterling overnight index average, SONIA.

A working group was set up by the ECB with the Swiss Financial Markets Authority, European Securities Markets Authority and European Commission to work on a new risk-free reference rate.

Once the group makes a recommendation on its preferred alternative risk-free rate, it will establish an approach to ensure a smooth transition to this rate with minimal market disruption, the ECB said.

The working group will regularly consult market participants and end users.