The practicalities of the EONIA/€STR transition for non-cleared repo market have been discussed at length by the ICMA ERCC and the ERCC Operations Group. The ERCC has agreed on the following recommended best practice to be followed from October 1 2019:
- The Interbank market should transact purely on a fixed-rate basis (“classic repo”) and should no longer use floating rate repo.
- In the case of non-interbank transactions (such as dealer-to-client), where firms agree to transact on a floating-rate basis (using EONIA or €STR), best practice will be to apply the fixing of the penultimate accrual date of the transaction to the final (repurchase) date (i.e. “crystalizing”the penultimate fixing into a fixed rate for the final business day). This will allow for parties to send timely settlement instructions for the repurchase leg of the transaction.
- Where parties transact on a floating basis, using the crystallization methodology, this will create discrepancies between the repurchase price calculated and settled by the parties and the repurchase price that would have applied had it been possible to instruct after the final fixing. In this instance, the disadvantaged party can elect to claim the differential from the advantaged party, so long as the differential is equal to or greater than an agreed threshold per transaction (the exact amount to be determined by the ERCC in the coming weeks following further discussion).
- Any claim should be made immediately (ideally on the repurchase date, once the final fixing is known), and any reimbursement should be made on the business day following the repurchase date. Ideally, any claims or reimbursement made with respect to the same day should be made in aggregate. In any event, any claims or reimbursements should be made no later than 30 days after the repurchase date.
The full document is available at https://www.icmagroup.org/assets/documents/ERC/ERCCEONIA-STR-transitionrepo-market-best-practiceMEMO-050719.pdf