A new methodology will apply to the EONIA rate on 2 October 2019, without requiring any contractual amendments.
This communication reflects HSBC’s current understanding of the expected changes as at September 2019. This overview is not complete or exhaustive and does not constitute any form of advice or recommendation.
To comply with certain provisions of the European Benchmark Regulation (BMR) that will enter into force on 1 January 2020, several interest rate benchmarks used to determine interest rates for a wide range of financial products, including EONIA (Euro Overnight Index Average), are being reformed. The European Benchmark Regulation forms part of a global reform of interest rate benchmarks. You will find further information on this global reform on the European Central Bank (www.ecb.europa.eu)1 and the Financial Stability Board (www.fsb.org)2 websites.
EONIA’s calculation methodology and publication calendar will change on 2 October 2019
- EONIA is a daily overnight benchmark rate used to determine interest rates that apply to certain types of loans, overdrafts and other financial products denominated in euros.
- Since it will not comply with the European Benchmark Regulation, EONIA must be reformed and progressively replaced by a new benchmark rate called €STR (Euro Short Term Rate), until its demise on 3 January 2022.
- €STR is a new daily overnight benchmark rate developed by the European Central Bank (ECB) based on the previous day financial transactions reported to the European System of Central Banks (ESCB) for statistical purposes.
The ECB will publish €STR’s value for the first time on 2 October 2019 at 8am.
From that day onwards, EONIA’s value will be equal to €STR’s value plus 8.5 basis points (0,085%), a spread decided by the ECB.
The modified EONIA will be published by the European Money Market Institute (EMMI) every day at 9:15 am reflecting the financial transactions of the previous day (“T+1”) whereas EONIA is currently being published the same day of the transactions it reflects at 7pm (“T”).
What do these changes mean?
- EONIA’s new calculation methodology does not require contractual amendments.
As stated by the European Money Market Institute (EMMI), its administrator, EONIA’s economic value is not modified by the new calculation methodology.
- From 2 October 2019, any contractual reference to “EONIA” should be considered as a reference to “€STR plus 8.5 basis points”.
HSBC’s ability to provide the recalibrated EONIA rate through existing distribution channels will not be impaired either as its identifier and name remain the same.
- All market participants that use EONIA should however take the new publication calendar into consideration. They should make sure their internal systems and accounting procedures are updated to be able to get the daily EONIA rate on “T+1” at 9:15am (instead of “T” at 7pm).
- The working group on euro risk-free rates, for which the European Central Bank (ECB) provides the secretariat, has published a comprehensive paper that defines detailed best practice and recommendations related to the transition from EONIA to €STR. The « Report by the working group on euro risk-free rates on the impact of the transition from EONIA to the €STR on cash and derivatives products » is available on the ECB website3.
What are the next steps and are other benchmark rates being reformed?
- In compliance with the European Benchmark Regulation, fallback provisions that define which replacement benchmark rate should be used when the intended rate would be demised, must be introduced in contracts that reference EONIA.
- The ECB is expecting market participants to start using €STR instead of EONIA without waiting for 3 January 2022.
- Once central counterparty clearing houses (CCPs) switch their EONIA discounting regime to an €STR discounting regime, markets participants are likely to align in the over-the-counter (OTC) derivatives market, and compensate for the value transfer by exchange of cash payments. HSBC will provide you with further details in due course.
- As regularly stated by the Financial Stability Board, regulatory authorities expect Interbank Offered Rates such as LIBOR (London Interbank Offered Rate) to be reformed or replaced by alternative benchmark rates.
- HSBC is participating in a number of industry and regulatory working groups and is actively monitoring developments. We will be in contact with you in the coming year once replacements for the existing benchmark rates have been confirmed at industry level along with the timing and conditions of the transition.
In the meantime, please contact your usual HSBC representative or visit the aforementioned public websites for more information.
