May 15, 2019

ECB published a consultation, which was launched by the working group on euro risk-free rates, on recommendations to address the legal implications for new and legacy contracts referencing the euro overnight index average (EONIA), as a result of the proposed transition from EONIA to the euro short-term rate (€STR). Responses to this consultation should be sent by June 12, 2019.

The consultation describes the different legal options discussed by the working group over the last few months to ensure a smooth transition from EONIA to €STR. Market participants are invited to give feedback on the recommended legal actions to ensure a market-wide smooth transition from EONIA to €STR. The consultation on the EONIA to €STR Legal Action Plan is structured into four sections—

  • Recommended EONIA fallback rate that should be used on cessation of EONIA in new and legacy contracts, wherever possible and appropriate
  • Continued use of EONIA in new contracts
  • Legacy contracts maturing before December 2021, which is the EONIA discontinuation date
  • Legacy contracts maturing after December 2021

The working group recommends that market participants consider replacing EONIA with €STR as a reference rate for all products and contracts and that they make all operational adjustments necessary for using €STR as their standard benchmark as soon as possible. It is recommended that new contracts referencing EONIA include robust fallback provisions and an acknowledgement that references to EONIA will be understood to be references to EONIA as modified after the change to its methodology on October 02, 2019. For legacy contracts referencing EONIA and maturing after December 2021, market participants should consider replacing EONIA as a primary rate as soon as possible or embedding robust fallback clauses referencing the recommended fallback rate for EONIA. Additionally, the working group intends to recommend €STR plus a spread (the one-off computation of the difference between €STR and EONIA in the context of the proposed recalibrated EONIA methodology) as the EONIA fallback rate.

The EONIA to €STR Legal Action Plan covers legacy and new contracts referencing EONIA in different asset classes (derivative transactions, collateral agreements, and cash products) and was developed by the working group in close cooperation with the relevant trade associations and a group of law firms that are members of the subgroup on contractual robustness. This consultation follows the publication of a set of general guiding principles for fallback provisions in new contracts for euro-denominated cash products and the recommendations on the transition path from EONIA to €STR, which the working group issued in January and March 2019, respectively. ECB will evaluate all the responses and prepare a summary of the feedback received. This summary will be discussed by the working group and published on the ECB website, along with the other documents related to the meeting of the working group on July 04, 2019.

 

Related Links

Comment Due Date: June 12, 2019

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

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