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Collateral Interest and CSA Valuation in the EONIA to €STR Switch

Article Quant Q&A · Author: Steve N
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Summary

The document asks whether counterparties should receive compensation for both a change in swap fair value and a reduction in collateral interest when moving from EONIA to €STR discounting. Its hypothetical concerns a party that has posted collateral on a deeply out-of-the-money swap and previously received EONIA interest on that collateral. Under the proposed switch, the questioner expects a valuation adjustment paid by the counterparty, alongside lower interest income under €STR.

No answer is included, so the question of separate compensation remains open. The scenario highlights the relationship among collateral remuneration, discounting conventions, and derivative valuation, but does not specify the contractual terms, transition mechanics, or valuation framework needed to determine any adjustment. The described payment and value changes are assumptions posed for discussion rather than a demonstrated general rule.

Key ideas

  • The question examines the transition from EONIA to €STR for CSA discounting and collateral remuneration.
  • It distinguishes a change in swap fair value from a change in interest paid on collateral.
  • The hypothetical asks whether a collateral poster should receive compensation for both effects.
  • No answer is provided, and the result depends on contractual terms and transition mechanics.
  • The document does not establish a general rule for compensation.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# Switching from EONIA to ESTR for CSA discounting


# Switching from EONIA to ESTR for CSA discounting












In practice, when bilateral counterparties switch from OIS to ESTR discounting, the party which sees a fall in the fair value of the CSA contract gets compensated for the decrease by the other party (correct me if I'm wrong). As CSA discounting (ESTR) is used and ESTR is payed for collateral received (PAI), we are also seeing a fall in interest paid as it previously was payed based on EONIA.

Now hypothetically, if counterparty A had a swap with counterparty B, deeply out-of-the money for A, party A would have posted collateral and received EONIA as interest for the paid collateral. After switching to ESTR , the swap would go even deeper out-of-the money as discount rate decreases, where party B pays to A for the loss in fair value. But in addition to loss in fair value, A starts to receive lower interest for the collateral paid (ESTR vs. EONIA). Shouldn't party A also be compensated for the lost interest income (considering rates were actually positive)?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.