ECB published a report on the transfer of liquidity from the cash and derivatives products of the Euro Overnight Index Average (EONIA) to the Euro Short-Term Rate (€STR). This report aims to support a smooth transition from EONIA to the new €STR, taking advantage of the liquidity already present in the EONIA cash and derivatives market. It intends to provide guidance on how to ensure a liquid €STR cash and derivatives products market.
The report, by the private sector working group on euro risk-free rates, supplements a previous report from the working group on the impact of the transition from EONIA to the €STR on cash and derivatives products (published in August 2019) and provides clarifications on the topics that have been discussed since then. The working group highlights that contracts referenced to EONIA with maturities beyond January 03, 2022 would entail significant risks. It, therefore, recommends that market participants should replace EONIA products with €STR products and reduce their EONIA-linked legacy exposures as soon as possible.
To accelerate the transition process, market-makers are encouraged to proactively price in the €STR, rather than EONIA as their default, and central counterparties are recommended to consider developments in the nettability (compression) of the €STR and EONIA. The working group expects a full migration from EONIA-linked to €STR-linked products. It, therefore, recommends that
- the current EONIA market liquidity characteristics be used as a benchmark for building the initial target for the €STR
- market participants analyzing the available data assess the liquidity of the €STR derivatives market
Keywords: Europe, EU, Banking, Securities, EONIA, €STR, Risk Free Rates, CCPs, Interest Rate Benchmarks, Derivatives, ECB
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