Shearman & Sterling LLP | FinReg | EONIA Working Group Seeks Feedback on Implementation of Euro Risk-Free Rates
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  • EONIA Working Group Seeks Feedback on Implementation of Euro Risk-Free Rates
    The working group charged with implementing the European market's move away from EONIA, the current reference rate used in euro-denominated financial contracts, has published a consultation paper setting out its "Legal Action Plan" for transitioning to the chosen new euro short-term rate. The current consultation paper focuses on how the new rate should be incorporated into both new and existing financial contracts so as to ensure a swift and smooth transition from EONIA. The paper seeks feedback from market participants on its proposals. Responses should be sent by June 12, 2019.

    EONIA is used as a reference rate in a variety of financial contracts, including derivatives, collateral remuneration for derivatives and cash products such as commercial paper, repurchase agreements and default interest payable under syndicated loans. Under the new EU Benchmarks Regulation, which came into effect on January 1, 2018, EONIA is specified as a critical benchmark but does not comply with the Benchmark Regulation's new requirements, including the specifications around the methodology for calculating benchmarks. This has prompted the European Central Bank to develop a more robust risk-free rate in the form of the euro short-term rate or "€STR". The €STR will reflect the wholesale euro unsecured overnight borrowing costs of euro area banks. The ECB will begin publishing the €STR on October 2, 2019 and, if the working group's recommendations are followed, EONIA will cease to be published at the end of 2021.   

    The working group consists of senior officials from major credit institutions, as well as observers from the Financial Services and Markets Authority, the European Securities and Markets Authority, the ECB and the European Commission. It has so far recommended that €STR should be adopted as EONIA's replacement and that the methodology for calculating EONIA should become €STR plus a fixed spread as of the date of first publication of €STR (on October 2, 2019), ahead of the proposed phase-out of EONIA in 2021. Its recommendations in this latest consultation paper include:
    • Market participants should consider replacing EONIA with €STR for all financial products and should begin making the operational changes necessary to do so as soon as possible;
    • New contracts referencing EONIA should incorporate robust fall back provisions and an acknowledgement that references to EONIA will be interpreted according to the new methodology as of October 2, 2019;
    • Once €STR is published on October 2, 2019, new contracts should no longer reference EONIA; and
    • Market participants should consider replacing EONIA or embedding robust fall back clauses for all existing or "legacy" contracts maturing after December 2021 (when publication of EONIA should cease).

    The consultation paper also lists recommendations specific to the different types of financial contracts that reference EONIA and sets out specific questions for market participants in respect of each recommendation.

    View the ECB working group's consultation paper.

    View the ECB working group's webpage and link to response form

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