Working group on euro risk-free rates seeks feedback on Swaptions impacted by transition from EONIA to the €STR

  • The CCP discounting switch from EONIA to the €STR, planned for June 2020, will raise specific issues for swaption products if the exercise date of these contracts is after the CCP transition date
  • Feedback sought on whether to recommend a voluntary compensation for legacy swaptions impacted by the CCP discounting transition to €STR

Today the working group on euro risk-free rates has launched a public consultation on whether to issue recommendations to address specific issues for swaption[1] products as a result of the proposed transition from EONIA to the euro short-term rate (€STR).

The CCP discounting switch from EONIA to the €STR, planned for June 2020, will raise specific issues for such swaption products. If the exercise date of these contracts is after the CCP transition date, their valuation may change as a result of the discounting switch from EONIA to the €STR. However, the CCP compensation mechanism will not apply to them because the contracts are bilateral, not cleared.

This consultation from the working group on euro risk-free rates is seeking feedback as to whether it should issue recommendations regarding the voluntary exchange (or lack thereof) of a cash compensation between bilateral counterparties to such swaption contracts.

While this consultation only focuses on euro-denominated contracts, a similar consultation is being carried out by the US Alternative Risk-free Rate Committee (ARRC) for contracts denominated in US dollars containing similar statements and questions to allow market participants to respond in a consistent way.

This consultation follows the publication of a report on the transfer of EONIA’s cash and derivative markets liquidity to the €STR, which the working group issued in February 2020.

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