In September 2018, the European Central Bank (ECB)-organised private sector working group on euro risk-free rates recommended that the euro short-term rate (€STR) replace the euro overnight index average (EONIA) as the new euro risk-free rate. The €STR rate has been published by the ECB since 2 October 2019. At the same time, EONIA’s methodology has been recalibrated as €STR plus a fixed spread of 8.5 basis points.
Since 18 November 2019, €STR-linked OTC swaps are eligible for clearing in the EurexOTC Clear service. All EurexOTC Clear derivatives denominated in euro, including €STR swaps, reside in an EONIA-based Price Alignment Interest (PAI)/Price Alignment Amount (PAA) and discounting regime.
The next important milestone for the cleared derivatives market is the adoption of an €STR-based PAI/PAA regime. As previously communicated in Eurex Clearing circular 096/19, Eurex Clearing will switch from EONIA to €STR (without a spread) as the basis of PAI/PAA and discounting for all EurexOTC Clear derivatives denominated in euro. This step is consistent with the recommendations issued by the euro risk-free rates working group and follows consultations held with our Members.
To facilitate this change, Eurex Clearing has published the document “EurexOTC Clear – process and methodology of the EONIA to €STR discounting switch” which outlines the process and methodology of the EONIA to €STR discounting switch that will take place around 22 June 2020. It also contains a description of the relevant reporting and related compensation payments. The document can be found in the Member Section of Eurex Clearing. Further information and any documentation updates, including dates and details of a simulation dry run, will be provided via Eurex Clearing Circulars and Newsflashes.
2. Required action
The PAI (PAA) and discounting switch from EONIA to €STR including the mandatory cash compensation takes place within the existing Eurex Clearing infrastructure and does not imply structural changes. Please refer to the new document for a description of the process and the reports that can be used by the Members to reconcile the cash compensation fees.
All Clearing Members and their clients must analyse their impact including any vendor systems used.
3. Details of the initiative
The switch from EONIA to €STR PAI (PAA) and discounting changes the market value of all EurexOTC Clear derivatives denominated in euro. To mitigate profit-and-loss impacts (positive and negative) resulting from variation margin changes induced by the discounting switch, a mandatory and automatic euro cash debit or credit will be instructed as a fee, ensuring that the discounting switch does not create winners and losers. The published document “EurexOTC Clear – process and methodology of the EONIA to €STR discounting switch” describes the methodology behind the compensation and lists and describes all steps in the compensation process. It also specifies all Member and public reports that are relevant for the transition, enabling each Member to reconcile the compensation. The document is available in the Member Section of Eurex Clearing, under the following path:
Risk & Collateral Management > Benchmark Transition Information > EUR: EONIA-€STR Transition
To provide further transparency regarding the discounting switch, Eurex Clearing has prepared an additional version of the margin tool Cloud Prisma Margin Estimator (CPME) that uses the €STR curve for discounting euro-denominated cashflows.
Through this tool, Members can calculate the trade Net Present Value (NPV) and portfolio initial margin on arbitrary portfolios under €STR discounting and compare the values to those under EONIA discounting in the current Production version of CPME.
The two CPME versions are available under the following links:
|CPME Production (EONIA discounting):||https://eurexmargins.prod.dbgservice.com/|
|CPME What-if (€STR discounting):||https://whatif.eurexmargins.prod.dbgservice.com/|
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.
|Recipients:||All Clearing Members, Basic Clearing Members, Disclosed Direct Clients, FCM Clearing Members of Eurex Clearing AG, vendors and other affected contractual parties|
|Target Groups:||Front Office/Trading, Middle + Back Office, IT/System Administration, Auditing/Security Coordination|
|Contact:||Risk Exposure Management, T +49-69-211-1 28 28, email@example.com|
|Related circular:||Eurex Clearing Circular 096/19|
|Web:||EurexOTC Clear Release 10.1 initiatives page|
|Authorised by:||Dmitrij Senko|