20 Oct 2015


Secured funding: Are you losing a fortune using the wrong hedge?

EONIA was adopted after the financial crisis of 2008 as a near risk-free substitute to EURIBOR. However, the European money markets have gradually shifted away from unsecured EONIA based financing towards collateralized repo financing and hence it has now became apparent that EONIA no longer mirrors true funding behaviour and costs nor does it reflect ECB’s liquidity provision adequately. This development recently led to the adoption of the STOXX® GC Pooling indexes, Eurex’s secured money market index family, by the ECB as its new benchmark rate for fixed term euro deposits.

EONIA and repo rates differ substantially

Despite EONIA’s decreasing relevance, it is still used in the vast majority of derivatives contracts, in credit support annexes, and by clearing houses to charge clients on their outstanding loans and positions on a daily basis. Unsecured (EONIA) and secured rates (e.g. STOXX® GC Pooling Deferred Funding Rate) can differ substantially, and their spread is highly volatile especially during periods of increased central bank activity (see chart below).

As a result of the latest evolutions, EONIA swaps which have been traditionally used to hedge a repo’s interest rate risk, are generating an increasing amount of basis risk. If you are still using EONIA swaps to hedge repo risk then you might need re-evaluate risk exposures and rethink the instruments that can be used to achieve a more efficient hedge.

See how Eurex Exchange can help you on our website or see our factsheet below.

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