ECB欧洲央行-Report-by-the-working-group-on-euro-risk-free-rates-on-the-impact-of-the-transition-from-EONIA-to-the-€STR-on-cash-and-derivatives-products_72页_864kb

Summary of the Report by the Working Group on Euro Risk-Free Rates

Core Content

This report, published by the ECB in August 2019, focuses on the transition from EONIA (euro overnight index average) to the €STR (euro short-term rate) and its implications for cash and derivatives products. EONIA has been a widely used benchmark rate in the euro area, serving as a reference rate for financial instruments and as a discounting rate for collateralised cash flows. The transition, effective from 2 October 2019, involves recalibrating EONIA as the €STR plus an 8.5 basis point spread, with EONIA publication ceasing on 3 January 2022.

The report provides recommendations and observations for market participants to prepare for the transition, with a focus on operational, valuation, and legal aspects. It outlines how different financial products and models should adapt to the new benchmark, ensuring a smooth and compliant transition.

Main Recommendations

1. Transition from EONIA to €STR

• Publication Time Change: EONIA will transition from being published at 19:00 CET on T to 09:15 CET on T+1, starting on 2 October 2019.
• Operational Adjustments:
  • Screen affected transactions and systems.
  • Prepare teams for enhanced oversight during the cutover period.
  • Develop a communication strategy for internal and external stakeholders.
• Settlement Adjustments:
  • Consider switching to T+2 settlement for derivatives/money market transactions.
  • Maintain T+1 settlement for cleared derivatives and swingline facilities.
• Cash Products:
  • For secured cash products (e.g., repos), use the last available fixing rate to ensure same-day settlement.
  • For unsecured cash products, assess the need for compensation mechanisms in new contracts.
• Investment Funds:
  • Amend calculation formulas and operational procedures for funds referencing EONIA.
  • Update prospectuses and ensure NAV calculations align with the new benchmark.
• Funds Transfer Pricing (FTP):
  • Replace EONIA with €STR in FTP models.
  • Adjust liquidity premium calculations due to the difference in EONIA (offered rate) and €STR (bid rate).
  • Develop a transition plan involving all relevant departments and systems.

2. Derivatives Transition

• Floating Rate Options (FROs):
  • Transition from EONIA to €STR before the end of 2021.
  • Avoid dual-strap curves where the projection and discounting curves differ.
  • Use either a fallback approach or an active transition approach.
• Collateral Remuneration Rate (CRR):
  • Recommend clean discounting for cleared derivatives.
  • Encourage the phased phasing-out of EONIA-based discounting.
  • If clean discounting is not feasible, use €STR + 8.5 basis points as an interim solution.
• Swaptions and Options:
  • Valuation of options on derivatives with physical settlement may require re-evaluation due to the switch to €STR discounting.
  • Consider the impact of the transition on valuation adjustments (xVa) models.
  • Monitor the impact on EURIBOR par swap rates and implied forward rates.

3. Securities and Cash Products

• Secured Cash Products:
  • Use the penultimate fixing for floating rate repos to "crystallise" the rate.
  • Any discrepancies in repurchase prices can be claimed by the disadvantaged party, provided the difference exceeds a threshold.
  • Claims should be made immediately and reimbursed on the business day following the repurchase date.
• Securities:
  • Transition to €STR-indexed securities and avoid issuing new EONIA-indexed securities with maturities beyond the transition period.
  • Apply the same transition approach to unlisted securities as for listed ones.

4. Interest Rate Curve Models

• Use a single curve per counterparty for all contracts.
• During the transition period, consider using:
  • EONIA curve based on EONIA instruments.
  • Shifted EONIA curve (parallel shift by -8.5 basis points) if liquid €STR instruments are not available.
  • €STR curve based on €STR instruments.
  • Shifted €STR curve (parallel shift by +8.5 basis points) during the transition period.

5. Legal and Contractual Considerations

• Fallback provisions in existing contracts were originally designed for temporary unavailability of EONIA, not its permanent discontinuation.
• Market participants are advised to implement robust fallback language in both new and legacy contracts to ensure legal certainty.
• Legal measures should be applied by asset class to address the transition.

Key Observations

• The transition timeline is from 2 October 2019 to 3 January 2022.
• The change in publication time will not affect EONIA availability on distribution channels or create time series gaps.
• Operational and contractual frameworks may lead to varied solutions depending on the product and market.
• The €STR is a bid rate, while EONIA is an offered rate, necessitating adjustments in pricing and valuation models.
• The no-arbitrage condition must be maintained in all €STR-linked derivative valuations.
• Collateral and settlement processes will need to be reviewed and adapted to the new rate publication schedule.
• IT systems and documentation should be updated to reflect the new benchmark and its implications.

Conclusion

The transition from EONIA to €STR represents a significant shift in the euro area's benchmark rate framework. Market participants must take proactive steps to ensure operational continuity, accurate valuation, and legal compliance. The working group has provided a comprehensive set of recommendations and guidance to help with this transition, while also highlighting the need for flexibility and individual assessments based on product-specific needs. The ECB emphasizes that this report is not legal or operational advice and that users are responsible for their own risk assessments and implementation.