ECB Proposal on Swaptions Impacted by Transition from EONIA to €STR
ECB working group on euro risk-free rates launched a public consultation on whether to issue recommendations to address specific issues for swaption products as a result of the proposed transition from EONIA to the euro short-term rate (€STR). This consultation follows the publication of a report on the transfer of EONIA’s cash and derivative markets liquidity to the €STR, which the working group issued in February 2020. The comment period for this consultation ends on April 03, 2020. EC and ECB will evaluate all responses and prepare and publish an anonymized feedback summary to be considered by the working group at its meeting on April 21, 2020.
The central counterparty (CCP) discounting switch from EONIA to the €STR, which is planned for June 2020, will raise specific issues for such swaption products. If the exercise date of these contracts is after the CCP transition date, their valuation may change as a result of the discounting switch from EONIA to the €STR. However, the CCP compensation mechanism will not apply to them because the contracts are bilateral, not cleared. This consultation from the working group on euro risk-free rates is seeking feedback on whether it should issue recommendations regarding the voluntary exchange (or lack thereof) of a cash compensation between bilateral counterparties to such swaption contracts.
This consultation paper discusses a variety of options to address the swaptions impacted by the CCP discounting transition from EONIA to €STR. Each recipient of this paper is responsible for making its own assessment about the suitability of the various options discussed herein. Recipients must continue to operate in an independent and competitive manner and they shall not use the content of this paper to coordinate their activities in breach of applicable law. While this consultation only focuses on euro-denominated contracts, a similar consultation is being carried out by the US Alternative Risk-free Rate Committee (ARRC) for contracts denominated in USD and it contains similar statements and questions to allow market participants to respond in a consistent way.
Related Links
Comment Due Date: April 03, 2020
Keywords: Europe, EU, Banking, Securities, Swaptions, EONIA, €STR, CCPs, Risk-Free Rates, Interest Rate Benchmarks, Derivatives, Benchmarks, ECB
Previous Article
US Agencies Issue Supplemental Instructions to FFIEC Call ReportsRelated Articles
EBA Guide to Monitor Threshold for Intermediate Parent Undertakings
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
PRA Finalizes Approach to Supervision of International Banks
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
FCA Issues PS21/9 on Implementation of Investment Firms Regime
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
EBA Proposes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
IOSCO Proposes Recommendations on ESG Ratings and Data Providers
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
ESMA Group Issues Recommendations on RFR Switch in Interdealer Market
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
EC to Defer Application of SFDR Standards Till July 2022
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
EIOPA Consults on Reporting and Disclosures Under Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) proposed to amend the supervisory statement on supervision of run-off undertakings that are subject to Solvency II regulation.
BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
EBA Seeks Views on Proportionality Assessment Methodology
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
