Rubric

www.ecb.europa.eu ©

Issues related to the EONIA transition

Cornelia Holthausen, ECB

Alberto López Martín, European Money Markets Institute

Carlos Molinas, Crédit Agricole

Jaap Kes, ING

Roundtable on euro risk-free rates

Working group on euro risk-free rates

Q&Asession

European Money Markets Institute56, Avenue des Arts 1000 Brussels | +32 (0) 2 431 52 08 | info@emmi-benchmarks.eu

EONIA

Alberto López Martín

Senior Benchmarks Officer

Roundtable on euro risk-free rates9 November 2018

European Central Bank, Frankfurt am Main

European Money Markets Institute37

EONIA submission activity

EONIA volumes have decreased further, to a yearly average of EUR 7 bil l ion in 2017. On 31st

October 2018, EONIA was published on the basis of an underlying activity of EUR 488 million.

Concentration of EONIA volume: between 1999 and 2009, approximately 51% of total daily

EONIA volume was reported by the 5 most active banks in the Eonia panel. In 2016, about 81%

of volume was reported by the top five banks. In 2017, this concentration indicator increased to

88%.

19.15

11.13

7.23

0

10

20

30

40

50

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

EUR B

illion

EONIA Volume Volume First 20 Volume - First 15 Volume - First 10 Volume - First 5

European Money Markets Institute38

EONIA’s representativeness: TARGET2 unsecured interbank activity

Source: First ECB public consultation on developing a euro unsecured overnight interest rate, Chart 4

EONIA volume

0

20

40

60

80

100

120

140

160

06/08 06/09 06/10 06/11 06/12 06/13 06/14 06/15 06/16 06/17

EUR B

illio

nSource: EMMI

European Money Markets Institute39

EONIA’s representativeness: a comparison with the ECB’s MMSR

On November 21, 2017, the ECB started publishing statistics on the euro money market based on

the data gathered in the context of the MMSR regulation.

The EONIA Panel captured 80% of the O/N interbank lending activity in 2017.

9.23 9.15

5.11

7.396.56 7.18

5.29 5.33 4.56

5.62

3.224.63

0

2

4

6

8

10

12

MP1 MP2 MP3 MP4 MP5 MP6 MP7 MP8 MP1 MP2 MP3 MP4

25 Jan to 14

Mar

15 Mar to 2

May

3 May to 13

Jun

14 Jun to 25

Jul

26 Jul to 12

Sep

13 Sep to 31

Oct

1 Nov to 19

Dec

20 Dec to 30

Jan

31 Dec to 13

Mar

14 Mar to 2

May

3 May to 19

Jun

20 Jun to 31

Jul

2017 2018

EUR B

illion

Eonia volume (average daily) O/N lending volume (average daily)

European Money Markets Institute40

Panel Banks with non-zero submissions

46 41 38 35 35 33 34 35 33 29 26 24 23 18 16 19 16 14 12

96%

86%78%

74% 73%68% 70% 73% 73%

68%60% 57%

52%

42% 44%

54%

44%40% 38%

0%

20%

40%

60%

80%

100%

0

10

20

30

40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Perc

enta

ge o

f Banks on P

anel

with P

ositive V

olu

me

Num

ber of Banks w

ith P

ositive

Volu

me

No. of Banks with Positive Volume Percentage of Banks on Panel with Positive Volume

EONIA submission activity

46

35

1412

12

13

76

0

2

4

6

8

10

12

14

0

5

10

15

20

25

30

35

40

45

50

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Num

ber of Countrie

s

Num

ber of Banks

No. of Banks with Positive Volume

Number of Countries

Geographic concentration indicators

WG Euro RFRs Subgroup #4EONIA-RFR Transition

41

Carlos Molinas, CA-CIBChair of subgroup 4 on EONIA transition

Agenda

1. EONIA “best case” scenario

2. Objectives and Challenges Subgroup #4

3. From A to B : EONIA/ESTER gap analysis and potential transition paths

4. Envisaged next steps and actions Subgroup #4

42

1. EONIA “Best case” Scenario

• EONIA is used:–As a reference rate for floating payments in derivatives and cash products

–For OIS curve to discount/value most future cash flows

• As of 1 January 2020, EONIA in its current form will notbe EU BMR Compliant.

• If EONIA stays “as it is” :–Worst case scenario - EONIA will be prohibited for new contracts and for legacybooks as of 1 January 2020

–Best case scenario - EONIA will be prohibited for new contracts and allowed for usein legacy books as of 1 January 2020

Ø Can you value your legacy books with a curve you are prohibited to use?

ØOur “best case” scenario is still catastrophic : liquidity in EONIA OIS curve willdisappear due to BMR prohibition. Valuation and risk management of cash flowscoming from legacy books will be impaired.

43

2. Objectives and Challenges Subgroup #4

• “Do nothing” is by far the worst course of action

• “Do something” involves risks that depend on how radical the

transition path is

• The market needs to move from a non sustainable benchmark

to a sustainable benchmark as per the end of the BMR

transitional period (1 January 2020)

ØOur objective is to identify, recommend and communicate a

transition path from EONIA to ESTER as smooth as possible that

protects market integrity and is the fairest to all benchmark users

44

EONIA

45

3a. From A to B : EONIA/ESTER gap analysis

ESTER

EUR EUR

Overnight Overnight

Unsecured Unsecured

Transaction Based Transaction Based

Unstable Panel Stable Panel

Narrow Panel Wider Panel

Bank Lending Bank Borrowing

Published on T Published on T+1

46

3b. From A to B : EONIA/ESTER Transition Paths

Key questions to determine suitable EONIA/ESTER Transition

Paths:

•Will EONIA and ESTER be published in parallel or wil l ESTER

succeed EONIA beyond the BMR transition date?

•Will EONIA and ESTER be independent rates or wil l the

methodology of EONIA evolve to become dependent on ESTER

beyond the BMR transition date?

•Can an EONIA-ESTER spread smoothen the transition?

•Can both EONIA OIS and ESTER OIS discounting curves coexist?

Where the market has to keep in mind that the end of the BMR

transition period is currently set on 1 January 2020

47

EONIA’s relationshipwith ESTER beyondEU BMR compliance

date?

Parallel publication?ESTER EONIA

spread?

Paralleldiscounting?

1. Parallel runApproaches

2. ContractualAlternativeApproaches

Parallel publication?

ESTER EONIA spread?

Parallel discounting?

3.Recalibration /Spread / DualDiscounting

4.Recalibration /Spread / CleanDiscounting

Parallel discounting?

5.Recalibration /

No Spread

ESTER EONIAspread?

Parallel discounting?6. Pure

Succession

û

û

û

û

û

Dependent

n/a

n/a

n/a

Parallel discounting?

û

See Approach 3(publicationdiscontinued)

See Approach 4(publicationdiscontinued)

3b. From A to B : EONIA/ESTER Transition PathsARRC’s Paced

Transition

Plan

Swiss Market

Transition

UK Market

Transition

4. Envisaged next steps and actions Subgroup #4

48

SG4 agrees andpresents its report to

the WG EUR RFR• December 1st 2018

WG EUR RFR tentativelyendorses SG4

recommendations andpublishes report

• December 19 2018

WG EUR RFR considerspotential market

feedback and publishesits final recommendation

• Q1 2019

Recipients ofrecommendations

perform evolutions (mayinvolve publicconsultations)

• Q2-Q32019

ESTER startsbeing published

• Q3 2019

Transition achieved • Aiming for1st January 2020