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

The CCP (central counterparty) 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.

The ECB says this consultation 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 it 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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Today the European Central Bank's working group on euro risk-free rates has launched a public consultation on whether to issue recommendations to address specific issues for swaption products as a result of the proposed transition from EONIA to the euro short-term rate (€STR).

The CCP (central counterparty) 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.

The ECB says this consultation 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 it 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.