New Methodology Adopted For Euro Risk-Free Rate

The European Money Markets Institute (EMMI) published the summary of the stakeholder consultation feedback on the recommendations for EONIA by the Working Group on euro risk-free rates. In view of the feedback received, EMMI adopts the new methodology recommended by the Working Group, which will take effect on 2 October 2019.

On 14 March 2019, the Working Group on euro risk-free rates recommended market participants to gradually replace EONIA with the ECB’s €STR for all products and contracts, making the €STR their standard reference rate. In addition, the Working Group recommended EMMI to modify the current EONIA methodology in order to guarantee the continuous publication of EONIA during the interim until market participants have made arrangements to smoothly transition to the new €STR rate.

As a result, EMMI launched a consultation which received 58 responses from a broad range of institutions, including banks, trade associations, infrastructure providers, consultancy firms and other respondents. EMMI has analysed the responses and determined the following way forward for the transition from EONIA to €STR:

·        Methodological change:

o   On 2 October 2019 the change in EONIA’s methodology will take effect. From this date onwards, EONIA will be calculated as the €STR plus a spread.[1]

o   EONIA will be calculated on every TARGET day in which the €STR is published.

·        Implementation plans:

o   The reliance on the €STR for EONIA’s determination makes it necessary for EONIA to be calculated and published after the €STR publication, which the ECB will do no later than 9:00 a.m. To this end, from 2 October 2019 onwards, EONIA will be published at or shortly after 9:15 a.m. CET on the TARGET day following the TARGET day whose market it intends to represent.

o   In order to avoid the publication of two indices representing the same TARGET day, there will be no EONIA published on 1 October 2019

Discontinuation plans:

o   EMMI will provide EONIA under the recalibrated methodology up until 3 January 2022, the date on which EONIA would be discontinued.

o   This date should act as an incentive for the market to fully adopt the €STR as EONIA’s replacement.

EMMI will implement these changes with the purpose of facilitating a smooth and orderly transition from EONIA to the €STR. In addition, EMMI is currently working toward the goal of obtaining an authorisation for EONIA under the EU BMR, with the ultimate objective of easing the market’s adoption of the new methodology.

Source: The European Money Markets Institute

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