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Selecting and Sourcing a Euro Risk-Free Yield Curve

Article Quant Q&A · Author: Nikola
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Summary

The document discusses choosing market data for a Euro risk-free yield curve used in an interest-rate risk model. It describes a question about reproducing short-dated swap-rate observations and finding equivalent data on Bloomberg. The answer identifies Bloomberg curve pages for Euro overnight indexed swaps and €STR swaps, and recommends €STR as a defensible reference for this application.

The reasoning draws on regulatory guidance that institutions should select an appropriate currency curve without entity-specific or instrument-specific credit and liquidity spreads. It also cites central-counterparty use of €STR for discounting and price-alignment interest, while noting that one standard curve is not mandated universally. Data licensing is a practical constraint: enterprise use and curve-toolkit downloads may require additional licenses. The response offers an informed practitioner view, not a universal regulatory ruling or a detailed curve-building recipe. The example observations date from an earlier market regime, so present-day conventions, instrument definitions, and vendor access should be checked before reproducing them.

Key ideas

  • Risk-free curve choice for Euro risk calculations requires judgment because guidance does not mandate one universal curve.
  • Regulatory guidance calls for excluding entity-specific and instrument-specific credit or liquidity spreads.
  • The response recommends considering €STR, citing its role in major clearing houses’ discounting practices.
  • Bloomberg offers distinct curve references for Euro OIS and €STR.
  • Vendor licensing can limit enterprise use and access to downloaded curve data.

Tags

Fixed incomeForexRisk management
Full text
# Risk-free yield curve creation for Euro


# Risk-free yield curve creation for Euro












I'm working on a Interes Rate Risk in Banking Book model for EVE calculation. It doesn't matter if you know what it is or not, I just need help with one step. That step is the creation of risk free yield curve for Euro currency. I'm using Moorad Choudhry book 'Banking Principles 2nd'.

In one of the examples, he provided data for the creation of risk-free yield curve via swap rates.

Here is the picture:

Data are from Reuters, at date 31/12/2018.

```
TN  -0.435028
1W  -0.466834
1M  -0.398161
2M  -0.396682
```

Can some help me what to look to find these data for any given day, possibly at Bloomberg?

Looks like RIC is 0#EURZ=R.

## Answer by AKdemy (score 3, accepted)

https://quant.stackexchange.com/a/74304

For Bloomberg, there are technically two swap curves that could work:

-`ICVS 133` for EUR OIS and

-`ICVS 514` for €STR.

I agree with @Dimitri Vulis that you should use €STR. With Bloomberg, you will have a few issues here though:

- The user agreement with a terminal license will not allow you to use it for Enterprise purposes without a separate license

- You cannot download RFR rates (SOFR, €STR, ...) with the curves toolkit without an additional license as a result of this.

I cannot speak of Reuters but I think it will be more or less the same because our treasury also uses a data license to feed Reuters data into Kondor.

Some details:

EBA final report

> ..., since there is no universal risk-free spot rate curve per currency, it is left to institutions to select it, in line with paragraph 115(n) of the 2018 EBA GL.

Now 115(n) is not very specific and states that

> An appropriate general ‘risk-free’ yield curve per currency should be applied (e.g. swap rate curves). That curve should not include instrument-specific or entity-specific credit spreads or liquidity spreads.

However, the BIS is a bit more specific and writes

> discount factors must be representative of a risk free zero-coupon rate. An example of an acceptable yield curve is a secured interest rate swap curve

Although ESTR is unsecured, (explanation for this choice can be found on the ECB Website) it is the used as the official risk free rate for price alignment interest and discounting at major CCPs and it would be difficult to argue why one would not use €STR based on my teams opinion for IRRBB computation.

For example, transition to €STR happened in July 2020 on LCH Group and the CME; Link for CME announcement

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.