Expertise

Publication of the €STR Has Begun.  Many recent initiatives have aimed at reform of benchmark interest rates, including of EONIA (the 1-day EURIBOR rate).

The ECB began publishing EONIA’s intended replacement, the euro short-term rate (€STR) for the first time on 2 October 2019. The €STR reflects the wholesale euro unsecured overnight borrowing costs of banks located in the euro area.

Publication of the €STR follows a long period of preparation and test releases between 16 and 27 September 2019. Going forward, it will be published on each TARGET2 business day based on transactions conducted and settled on the previous TARGET2 business day.

Transition from EONIA to €STR

The ECB working group on euro risk-free rates recommends that market participants gradually replace the existing EONIA rate with the €STR for all products and contracts, making the €STR their standard reference rate. Until discontinued on 3 January 2022, EONIA will continue to be calculated, but with a new methodology, redefined as the €STR plus a fixed spread, calculated by the ECB as 0.085% (8.5 basis points).

The working group has also published a set of recommendations on the legal action plan for the transition from EONIA to the €STR, including recommendations that market participants should:

• consider, whenever feasible and appropriate, no longer entering into new contracts referencing EONIA, in particular new contracts maturing after 31 December 2021, as EONIA will cease to exist after that date;
• consider, for existing contracts referencing EONIA and maturing after December 2021, replacing EONIA as a primary rate as soon as possible or embedding robust fallback clauses;
• include robust fallback provisions in those cases where new contracts still reference EONIA and mature after December 2021, or fall within the scope of the EU Benchmarks Regulation (BMR).

The working group further recommends that:

• market participants actively transition floating rate options (FROs) referencing EONIA to €STR FROs before the end of 2021;
• central counterparty clearing houses (CCPs) align their discounting switch dates as much as possible to transition from an EONIA discounting regime to a €STR discounting regime, and set the discounting switch date as early as possible, preferably towards the end of the second quarter of 2020;
• market participants introduce all necessary modifications in order to be able to issue, buy, trade and manage new securities indexed to the €STR and avoid issuing new securities indexed to EONIA with maturities going beyond the transition period.

KEY CONTACT(S): Patrick Molloy, Donal O’Donovan, David O’Mahony, Michael Hastings, Turlough Galvin, Christian Donagh, Alan Keating, Richard Kelly