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    ECB Proposal on Swaptions Impacted by Transition from EONIA to €STR

    March 13, 2020

    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.

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    Comment Due Date: April 03, 2020

    Keywords: Europe, EU, Banking, Securities, Swaptions, EONIA, €STR, CCPs, Risk-Free Rates, Interest Rate Benchmarks, Derivatives, Benchmarks, ECB

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