EurexOTC Clear: Summary of consultation on the transition plan for transactions referencing the EONIA benchmark

1.  Introduction

In September 2018, the ECB-organised private sector working group on euro risk-free rates (EUR RfR WG) recommended that the euro short-term rate (€STR) replace the euro overnight index average (EONIA) as the new euro risk-free rate. €STR was first published on 2 October 2019 by the ECB and EONIA’s methodology was at the same time recalibrated as €STR plus a fixed spread of 8.5 basis points. As of this day, EONIA and €STR represent economically equivalent benchmarks.

Following the recommendations from the EUR RfR WG, a major milestone achieved by Eurex Clearing was the adoption of €STR for discounting EUR-denominated cleared OTC derivatives on 27 July 2020. This limits Eurex Clearing’s main usage of the EONIA benchmark to the clearing of EONIA overnight index swaps and EONIA-EURIBOR basis swaps.

Furthermore, the European Money Markets Institute as the index administrator of EONIA has announced in 2019 in its EONIA Benchmark Statement that it will discontinue publishing EONIA on Monday, 3 January 2022, as recommended by the EUR RfR WG.

As a result of market-wide consultation, Eurex Clearing will implement the suggested method

• Single-Step Conversion with Cash Compensation to €STR-flat

for transactions referencing the EONIA benchmark starting on 15 October 2021 and executed over the following weekend.

2.  Required action

Overall, the transition from EONIA to €STR might have an impact on clearing participants’ internal processes and positions. Therefore, it might be necessary for clearing participants to update their internal processes and technical interfaces to take these proposed changes into account.

3.  Details of the initiative

On 10 November 2020, with Eurex Clearing Circular 097/20, Eurex Clearing invited its Members and their clients to provide feedback until 30 November 2020 on the proposed treatment of references to EONIA in outstanding, cleared OTC trades. In the consultation, multiple routes to implement the EUR RfR WG recommendation and their potential advantages and disadvantages were outlined. The following resulted from the consultation:

A. Transition route

A significant majority of the responses agreed with the route proposed by Eurex Clearing, Single-Step Conversion with Cash Compensation to €STR-flat, with no clear preference of alternative methods, among other responses.

With this method, active conversion of all explicit EONIA floating rate references to €STR-flat will take place. Any simple spread above the floating rate reference or fixed rates defined in affected trade confirmations will remain unchanged (only the benchmark index changes). A one-off cash compensation will be introduced to mitigate the associated change in present values of affected trades. The conversion will be mandatory for all cleared trades referencing EONIA as of the conversion date. Upon completion of the conversion, EONIA floating-rate references will no longer be eligible for the EurexOTC Clear service.

B. Conversion date

The consulted conversion date was 19 November 2021. Although a majority of the respondents can support a November 2021 timeline as proposed, a substantial portion of the submitted answers expressed preference for an earlier timeline as well as an alignment of the conversion across the cleared market. In alignment with a significant majority of respondents, it is intended to implement and execute the conversion starting on 15 October 2021 and lasting through the following weekend.

Additional technical details of the targeted conversion will be discussed with market participants and made available in future announcements.

Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions or FCM Clearing Conditions of Eurex Clearing AG, as applicable.

Further information