Issues related to the EONIA transition

Transcription

1 Rubric Working group on euro risk-free rates Issues related to the EONIA transition Cornelia Holthausen, ECB Alberto López Martín, European Money Markets Institute Carlos Molinas, Crédit Agricole Jaap Kes, ING Q&Asession Roundtable on euro risk-free rates

2 EONIA Roundtable on euro risk-free rates 9 November 2018 European Central Bank, Frankfurt am Main Alberto López Martín Senior Benchmarks Officer European Money Markets Institut 56, Avenue des Arts 1000 Brussels +32 (0) info@emmi-benchmarks.eu

3 EONIA submission activity EONIA volumes have decreased further, to a yearly average of EUR 7 billion in On 31 st October 2018, EONIA was published on the basis of an underlying activity of EUR 488 million. EUR Billion EONIA Volume Volume First 20 Volume - First 15 Volume - First 10 Volume - First 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%. European Money Markets Institut 37

4 EONIA s representativeness: TARGET2 unsecured interbank activity EONIA volume EUR Billion /08 06/09 06/10 06/11 06/12 06/13 06/14 06/15 06/16 06/17 Source: First ECB public consultation on developing a euro unsecured overnight interest rate, Chart 4 Source: EMMI European Money Markets Institut 38

5 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 Eonia volume (average daily) O/N lending volume (average daily) 12 EUR Billion 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 May to 19 Jun 20 Jun to 31 Jul European Money Markets Institut 39

6 EONIA submission activity Panel Banks with non-zero submissions Number of Banks with Positive Volume % 96% No. of Banks with Positive Volume Percentage of Banks on Panel with Positive Volume 86% 78% 74% 73% 68% 70% 73% 73% 68% 60% 57% 52% 42% 44% 44% 40% 38% % 80% 60% 40% 20% 0% Percentage of Banks on Panel with Positive Volume Geographic concentration indicators Number of Banks No. of Banks with Positive Volume Number of Countries Number of Countries European Money Markets Institut 40

7 WG Euro RFRs Subgroup #4 EONIA-RFR Transition Carlos Molinas, CA-CIB Chair of subgroup 4 on EONIA transition 41

8 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

9 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 not be EU BMR Compliant. If EONIA stays as it is : Worst case scenario - EONIA will be prohibited for new contracts and for legacy books as of 1 January 2020 Best case scenario - EONIA will be prohibited for new contracts and allowed for use in 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 will disappear due to BMR prohibition. Valuation and risk management of cash flows coming from legacy books will be impaired. 43

10 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

11 3a. From A to B : EONIA/ESTER gap analysis EONIA 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 45

12 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 will ESTER succeed EONIA beyond the BMR transition date? Will EONIA and ESTER be independent rates or will 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

13 3b. From A to B : EONIA/ESTER Transition Paths EONIA s relationship with ESTER beyond EU BMR compliance date? Dependent Parallel publication? ESTER EONIA spread? ESTER EONIA spread? n/a û Parallel discounting? Parallel discounting? Parallel discounting? û û n/a 1. Parallel run Approaches 2. Contractual Alternative Approaches 3. Recalibration / Spread / Dual Discounting 4. Recalibration / Spread / Clean Discounting 5. Recalibration / No Spread ARRC s Paced Transition Plan Swiss Market Transition Parallel publication? û ESTER EONIA spread? û Parallel discounting? Parallel discounting? û n/a See Approach 3 (publication discontinued) See Approach 4 (publication discontinued) 6. Pure Succession UK Market Transition 47

14 4. Envisaged next steps and actions Subgroup #4 SG4 agrees and presents its report to the WG EUR RFR December 1 st 2018 WG EUR RFR tentatively endorses SG4 recommendations and publishes report December WG EUR RFR considers potential market feedback and publishes its final recommendation Q Recipients of recommendations perform evolutions (may involve public consultations) Q2-Q ESTER starts being published Q Transition achieved Aiming for 1 st January