In September 2018, the European Central Bank (ECB) working group on euro risk-free rates recommended that the euro short-term rate (€STR) replaces the euro overnight index average (EONIA) as the new euro risk-free rate. The new €STR rate will first be published on 2 October 2019 by the ECB. At the same time, EONIA’s methodology will also be recalibrated such that EONIA will become €STR plus a fixed spread determined by the ECB from this date. On 31 May 2019, the ECB provided the one-off spread between €STR and EONIA as being calculated at 0.085% (8.5 basis points) i.e. EONIA = €STR + 0.085%.
In addition to the change in methodology there is also going to be a change in the publication as the new €STR rate (as announced on 11 July 2019) will be available by 08:00 CET on each TARGET2 business day, based on actual individual transactions from the previous day. If errors are detected following the publication of €STR that affect €STR by more than two basis points, the ECB will revise and re-publish €STR on the same day at 09:00 CET. No changes will be made to €STR after that time.
Hence, the publication of EONIA will also be changed: it will be at or shortly after 09:15 CET on the business day following the execution of trades (T+1). Currently, the publication is at 19:00 CET on the same day (T). It is envisaged that the EONIA publication will end on 2 January 2022.
The ECB working group on euro risk-free rates recommends that Trading Participants gradually replace EONIA with the €STR for all products and contracts, making the €STR their standard reference rate. This circular outlines changes and future steps envisaged to support and facilitate a successful transition from EONIA to €STR for Eurex.
2. Required action
Trading Participants are requested to review this document and, if impacted, to respond to the questions asked regarding EURO STOXX 50® Total Return Futures.
Please fill out the attached form and send your responses to the following e-mail address: firstname.lastname@example.org.
Overall, the transition from EONIA to €STR might have an impact on Trading Participants’ internal processes, trading and positions. Therefore, it might be necessary for Trading Participants to update their internal processes and technical interfaces to allow for these proposed changes.
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3. Details of the Proposals
EURO STOXX 50® Total Return Futures
EURO STOXX 50® Total Return Futures (TRF) are defined in Subpart 1.22 Contract Specifications for Index Total Return Futures Contracts within the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland.
In sub-section 22.214.171.124.1 the Funding Rate is specified. The Funding Rate applicable to Index Total Return Futures Contracts represents the benchmark overnight funding rate over which the TRF Spread quoted and traded is applicable (“Funding Rate”) and for Index Total Return Futures Contracts on EURO STOXX 50® (Product ID: TESX) the Funding Rate is Eonia® (as a percentage) provided by EMMI a.i.s.b.l.
This Funding Rate is applied to calculate the Accrued Funding prior to trading on each trading day. For Index Total Return Futures Contracts, the value of Accrued Funding is calculated on each trading day using the Funding Rate from T-1 to calculate the Daily Accrued applicable under sub-section 126.96.36.199.2.
From 2 October 2019, we will continue to use the funding rate equivalent to the recalibrated EONIA as the Funding Rate applicable. It has been determined that EONIA for a transitory period will be defined as €STR (as determined daily by the ECB at 08:00 CET) plus a fixed spread (as determined by the ECB on a one-off basis of 0.085% or 8.5 basis points on 31 May 2019).
Eurex’ proposal is therefore to amend sub-section 188.8.131.52.1 Funding Rate from 2 October 2019 as follows:
184.108.40.206.1 Funding Rate
The Funding Rate applicable to Index Total Return Futures Contracts represents the benchmark overnight funding rate over which the TRF Spread quoted and traded is applicable (“Funding Rate”):
Do you agree with the proposed change for the definition of Funding Rate from EONIA® to become €STR + the ECB calculated spread between €STR and EONIA® under the revised methodology proposed?
The immediate impact of the recalibration for EURO STOXX 50® Total Return Futures is that EONIA®, which is currently distributed in the evening by 19:00 CET based on the transactions of that day will be delayed in publication. The current process is that EONIA® is entered as the Funding Rate by Eurex prior to the start of trading at 07:50 CET on the following trading day (T+1). Under the changed methodology, the Funding Rate will not be available prior to the current start of trading on the following trading day.
€STR will not be published until 08:00 CET and there is the potential that it can be revised and re-published up until 09:00 CET (latest). From 2 October 2019, the application of the proposed amended Funding Rate above will not be possible until 08:00 CET earliest and then is subject to change until 09:00 CET.
Eurex proposes to amend the start of trading to 08:15 CET to allow for the receipt of €STR and the calculation of the revised Funding Rate of €STR + spread and for the subsequent input into T7 and verification.
Please refer to attachment 1 of this circular to see Eurex’ proposal to amend Annex C in the Contract Specifications on trading hours, applicable as of 30 September 2019.
Do you agree with the proposed change for the trading hours applicable to EURO STOXX 50® Total Return Futures?
In sub-section 220.127.116.11 Market Disruption Calculation of Input Parameters, we currently note that if the provider of the EONIA® does not calculate and publish the overnight Funding Rate level prior to start of trading, or subsequently amends and re-publishes, then the last overnight Funding Rate available prior to start of trading shall be used.
Under the new proposed Funding Rate of €STR + spread it is acknowledged by the ECB explicitly that €STR itself is subject and revision in the case of error of two basis points or more up and could be revised and re-published up until 09:00 CET.
As such a revision in the Funding Rate change may be significant to two decimal places, Eurex’ proposal is to amend the current procedure and to therefore update the Funding Rate if €STR is revised.
Eurex’ proposal is therefore to amend from 2 October 2019 as follows:
18.104.22.168 Market Disruption Calculation of Input Parameters
(2) b) Funding Rate (t-1)
If the provider of the benchmark overnight funding rate does not calculate and publish the overnight rate used for the Funding Rate level prior to start of trading, [or subsequently amends and re-publishes] (to be deleted), then the last overnight rate [Funding Rate ](to be deleted) available prior to start of trading shall be used.
If the provider of the benchmark overnight funding rate does publish the overnight rate prior to the start of trading but then subsequently amends and re-publishes after the start of trading, then the amended overnight rate shall be used. This amended overnight rate shall be used to calculate the difference applicable to impacted trades in relation to their originally calculated Traded Futures Price and determine corresponding adjustments based on the amended rate. These adjustments shall be determined on the next trading day.
Do you agree with the proposed change to immediately incorporate any revised and re-published euro short term rate €STR published by the ECB to re-calculate the Funding Rate and be incorporated into the EURO STOXX 50® Total Return Futures price?
Phasing out of EONIA as a Floating Rate
At a point prior to the phasing out of EONIA at the end of 2021, Eurex Clearing will likely determine the methodology for a change of floating rate to a new €STR based rate, in line with the recommendations of the ECB working groups. The proposed dialog and consultation is outlined in Eurex Clearing Circular 071/2019 “Transition from EONIA to the euro short-term rate (€STR)”.
For EURO STOXX 50® Total Return Futures this means:
Eurex would propose that the underlying Funding Rate used for the EURO STOXX 50® Total Return Futures could also switch to the €STR based floating rate at that time and in parallel a compensation mechanism be put in place for all open interest in all expiries at the time that such a decision to amend is undertaken.
The timing for the implementation of such an amendment in the OTC IRS market generally and the implementation at EurexOTC Clear is not yet determined, but the proposal would be to define both the timings and compensation methodology when certainty is available.
Do you agree with the proposal to switch the Funding Rate of EURO STOXX 50® Total Return Futures to the proposed €STR based floating rate and to simultaneously put in place a compensation methodology in line with the implementation timelines to be determined by Eurex Clearing?
Please note for EUR Equity Total Return Futures or any subsequent EUR based Index Total Return Futures, Eurex will already specify that as of 1 January 2020 Eurex will switch the Funding Rate applicable from €STR + spread to €STR flat and that this should be incorporated in any TRF spread calculations for expiries beyond those dates.
All Trading Participants of Eurex Deutschland and Vendors
Front Office/Handel, Middle + Backoffice, IT/System Administration, Revision/Security Coordination
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