EURO STOXX 50® Index Total Return Futures (TESX) – Consultation on the transition of the reference Funding Rate from €STR plus 0.085 percent to €STR (flat)

1.    Introduction

Eurex proposes to make an amendment of the Contract Specification of the EURO STOXX 50^® Index Total Return Futures (TESX) transitioning the reference Funding Rate euro short-term rate (€STR) plus the ECB provided EONIA transition spread (0.085 percent or 8.5 basis points) to €STR flat.

Eurex Clearing proposes a conversion methodology designed to mitigate the valuation impact due to this change in Contract Specifications for all open positions held at the implementation date.

We ask all interested parties to review the proposals and provide responses and feedback where possible until 13 August 2021.

The planned effective date for such a transition is yet to be determined. The results of this consultation and any subsequent actions will be communicated in due course via a Eurex Clearing circular.

2.  Required action

Clearing Members are requested to review the proposed changes as the transition to €STR flat might have an impact on Clearing Members’ internal processes, trading and open positions. Therefore, it might be necessary for Clearing Members to update their internal processes and technical interfaces to adapt for these changes.

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3.  Details of the initiative

In September 2018, the ECB working group on euro risk-free rates recommended to replace EONIA by €STR as the new euro risk-free rate. It was also determined to recalibrate EONIA’s methodology to effectively become €STR plus a fixed spread as determined by the ECB. This was determined as 0.085 percent (8.5 basis points) prior to the implementation of the amended calculation method for EONIA on 2 October 2019. The ECB working group on euro risk-free rates also recommended that trading participants gradually replace EONIA with €STR for all products and contracts, establishing €STR as the standard reference rate.

In a first step and in line with ECB’s working group recommendation, Eurex amended the Contract Specification of the EURO STOXX 50^® Index Total Return Futures (TESX) on the transition on 2 October 2019, such that the referenced funding rate became €STR plus the ECB provided Spread (i.e. Funding Rate (%) = €STR(%) + 0.085%). More details are available in Eurex Circular 087/19. This amendment had no impact on the valuation of outstanding contracts.

In a second step of the transition from EONIA to €STR, Eurex intends to amend the Contract Specifications applicable to the EURO STOXX 50^® Index Total Return Futures to rebase the reference funding rate as €STR flat, i.e. by removing the ECB fixed spread. The amendment of the Contract Specification shall be accompanied by a conversion approach, such that holders of open positions in these contracts as at the implementation date are not economically impacted by the implementation of the contractual change to the funding rate.

The proposed amendment to the Eurex Deutschland Contract Specifications and accompanying changes to the Clearing Conditions of Eurex Clearing AG, the determination of the conversion levels, their application to open positions, and the determination of required inputs are all the subject of this document for consultation purposes.

B. Topics of consultation

EURO STOXX 50^® Index Total Return Futures (TESX) were introduced at Eurex Exchanges on 2 December 2016 and were amended in 2019 to update the reference funding rate to €STR+8.5 basis points. The Funding Rate is used on each trading day to calculate the Accrued Funding used in the determination of both traded prices and settlement prices in index points for each expiration on that day. Adjustment of the Funding Rate impacts both traded and settlement prices from the reference date.

Adjustment to the settlement prices will impact the valuation of all open positions held at Eurex Clearing which resulted from trading activity on the premise of the Contract Specifications prior to the date of implementation of a change to the Funding Rate. Eurex Clearing therefore proposes to implement a conversion methodology to holders of open positions, as at the date of implementation of the Funding Rate change, to mitigate the valuation impact of such amendment.

Eurex and Eurex Clearing would like to receive feedback from both Trading and Clearing participants on the proposed methodology and practical application of such a change, specifically on:

• Proposed amendments to the Contract Specifications of Eurex Deutschland required to implement such a change (Attachment 1a)
• Proposed amendments to the Clearing Conditions of Eurex Clearing AG required to implement such a change (Attachment 1b)
• Proposed methodology for determination of the inputs required for the proposed calculation methodology by Eurex (i.e. EURO STOXX 50^® Index (SX5E) Forward Points) (Attachment 2)
• Proposed conversion calculation methodology of Eurex Clearing (Attachment 3)
• Proposed implementation by Eurex Clearing of the conversion methodology using the Price Correction Service (Attachment 4)

Eurex Clearing and Eurex would seek such feedback via the Eurex Questionnaire Form in Attachment 5.
 

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.

Attachments:

• Attachment 1a – Proposed Changes to the Contract Specifications
• Attachment 1b – Proposed Changes to the Clearing Conditions
• Attachment 2 – Proposal for the determination of EURO STOXX 50^® Index (SX5E) Forward Points
• Attachment 3 – Proposed Conversion Methodology
• Attachment 4 – Proposed use of Price Correction Service
• Attachment 5 – Questionnaire

Further information