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EONIA to €STR: Discounting Derivatives and Basis Risk

Article Quant Q&A · Author: BrownianBread
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Summary

The document asks how the transition from EONIA to the euro short-term rate (€STR, called ESTER in the text) could affect discounting for new and existing derivatives, curve construction, and the treatment of any basis between the rates. The question is framed around EONIA’s expected restriction from January 2020.

The accepted answer says EONIA could still be used for discounting after 2020. If it became illiquid, counterparties might amend collateral agreements to use €STR instead; a nonzero EONIA–€STR basis could then create an economic effect. The exchange gives no curve-building procedure, quantitative example, or detailed treatment of that basis, and its statements are specific to the transition expectations discussed at the time.

Key ideas

  • The transition from EONIA to €STR raises questions about derivative discounting and curve construction.
  • The accepted answer says EONIA use could continue after 2020.
  • Counterparties might change collateral agreements to reference €STR if EONIA became illiquid.
  • A nonzero EONIA–€STR basis could affect the economics of derivatives after such a change.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# ESTER replacement for EONIA/EURIBOR


# ESTER replacement for EONIA/EURIBOR












Does anybody know what impact the replacement of EONIA with ESTER ( Euro Short TErm Rate ) will have on discounting existing or new derivatives once EONIA will be restricted as of Jan 2020? I'm interested in curve construction and how the eventual basis will be taken into account. Are there any papers discussing this topic that anyone can share?

## Answer by dm63 (score 3, accepted)

https://quant.stackexchange.com/a/41825

I believe that Eonia can still be used for discounting derivatives after 2020. Article: https://www.risk.net/derivatives/5848051/esma-eonia-can-be-used-in-csas-after-2020

If it becomes illiquid, counterparties can repaper csa's to Ester. That will cause an economic effect if there is a non zero Eonia/Ester basis.

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.