ECB published report on a set of recommendations addressing the impact of transition from the euro overnight index average (EONIA) to the euro short-term rate (€STR). The recommendations take an operational and valuation perspective, taking into account EONIA’s wide use as a reference rate and as a collateral remuneration and cash flow discounting rate. The report, by the private sector working group on euro risk-free rates, analyzes various financial products and processes affected by the transition, covering secured and unsecured cash products, securities, investment funds, derivatives, and models referencing EONIA.
The report urges market participants to prepare for the change in the publication time of EONIA from day T at 19:00 CET to the next business day T+1 at 9:15 CET that will follow the change in EONIA’s methodology as of October 02, 2019 (representing transactions executed on October 01, 2019). Regarding the change in publication time of EIONIA resulting from the planned recalibration of EONIA as the €STR, plus a fixed spread of 8.5 basis points as at October 02, 2019, the working group encourages market participants, among other things, to:
- Screen the inventory of affected transactions and system environments to assess the modifications needed to cope with the change in the publication time of EONIA and prepare relevant teams for enhanced oversight during the cut-over period
- Design a communication strategy geared toward internal and external stakeholders (clients in particular) to ensure awareness of impending changes
- Consider adjusting the default settlement time (that is, the lag between the last fixing date and the settlement date) in certain cases
The report also urges market participants to prepare for the discontinuation of EONIA on January 03, 2022. In this context, the working group recommends, among other things, that:
- Market participants actively transition floating rate options (FROs) referencing EONIA to €STR FROs before the end of 2021
- Central counterparty (CCPs) clearing houses align their discounting switch dates as much as possible to transition from an EONIA discounting regime to a €STR discounting regime and set the discounting switch date as early as possible, preferably toward the end of the second quarter of 2020
- Market participants introduce all necessary modifications to be able to issue, buy, trade, and manage new securities indexed to the €STR and avoid issuing new securities indexed to EONIA with maturities going beyond the transition period
Keywords: Europe, EU, Banking, Securities, EONIA, €STR, Risk-Free Rates, Recommendations, CCPs, Interest Rate Benchmarks, ECB
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