ICMA says settlement of €STR-based repo poses challenges

ICMA issues memorandum on repo market best practice with respect to the transition from EONIA to €STR

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 the Repurchase Price of a floating-rate repo indexed to an overnight index has to be calculated and instructed before the fixing and publication of the final rate and the parties decide to make retrospective reimbursements for any difference between the actual and correct Repurchase Prices, it is best practice to document this agreement and the deadline for reimbursement, if necessary in the Confirmation of the transaction, and for any reimbursement to be made immediately following the Repurchase Date, but no later than 30 days afterwards. Where several reimbursements are to be claimed on the same day, a single net amount should be claimed from a counterparty, rather than separate claims for each transaction. The net claim per day per counterparty should not be for less than EUR 500 or the approximate equivalent in other currencies.

These recommendations will be included in the next update of the ERCC Guide to Best Practice in the European Repo Market.

The full memorandum is available at https://www.icmagroup.org/assets/documents/Regulatory/Repo/ERCCEONIA-STR-transitionrepo-market-best-practiceMEMOupdated-270919.pdf

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