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    ECB Publishes Recommendations on Transition from EONIA to €STR

    July 16, 2019

    ECB published a set of recommendations, from the private sector working group on euro risk-free rates, on the legal action plan for transition from the euro overnight index average (EONIA) to the euro short-term rate (€STR). The recommendations of the working group are related to EONIA fallback rate, new contracts referencing EONIA, and legacy contracts referencing EONIA.

    Among other things, the working group recommends the €STR plus a fixed spread of 8.5 basis points as the EONIA fallback rate for all products and purposes. Market participants, whenever feasible and appropriate, should consider avoiding entering into new contracts referencing EONIA, in particular new contracts maturing after December 31, 2021, as EONIA will cease to exist after that date. For existing contracts referencing EONIA and maturing after December 2021, market participants should either consider replacing EONIA as a primary rate as soon as possible or embed robust fallback clauses. In cases where new contracts still reference EONIA and mature after December 2021, or fall within the scope of the EU Benchmarks Regulation (BMR), market participants should include robust fallback provisions.

    Additionally, to enhance transparency, while not strictly necessary, new contracts signed before October 2019 should ideally include clarification that the EONIA methodology is expected to change as of October 02, 2019 and that references in contracts to EONIA shall be understood to be references to EONIA as changed, unless otherwise agreed by the parties. The working group recommends that market participants consider focusing their efforts on amending legacy contracts maturing after December 2021. Legacy contracts with EONIA as the underlying/reference rate that mature before December 2021 will be covered by the ongoing publication of EONIA until the end of 2021.

     

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    Keywords: Europe, EU, Banking, Securities, EONIA, €STR, Legal Action Plan, Recommendations, Risk-Free Rates, Interest Rate Benchmarks, Fallback Provisions, ECB

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