The new overnight interest rate for the euro zone - Euro Short Term Rate

Change in the cash collateral interest rate for bilateral OTC derivatives

Due to the discontinuation of the publication of the EONIA, the cash collateral interest rate for bilateral OTC derivative transactions must be changed from EONIA to €STR basis before the end of 2021 or robust fallback clauses ("fallbacks") to the EONIA discontinuation must be agreed. The Working Group on Euro Risk Free Rates (RFR WG) points out that this changeover should, in principle, take place without a shift of market values (MV) between the contracting parties, so-called "value transfer".

A change in the cash collateral interest rate from EONIA to €STR without a premium or discount, ("€STR flat") results in a revaluation of the collateralised derivatives with the €STR swap curve, as there is an interest rate difference of 8.5 bp between the EONIA and €STR curves. This results in a countervailing change in the market value of existing bilateral OTC derivative positions for both counterparties. The RFR WG recommends that the changes in market value should be compensated for by means of a cash payment between the contracting parties.

This is the procedure that the Central Counterparties (CCPs) such as LCH and EUREX have also used for the changeover of the collateral interest rate of the centrally cleared derivatives over the weekend 19-21 July 2020. The market value effect resulting from the difference between MV_€STR - MV_Eonia (without changing the date or the forward rates) was settled with members and customers via a fee payment.

DZ BANK is guided by this when converting its collateralised bilateral derivatives business. The collateral interest rate is to be switched to €STR flat at a date to be agreed. At the same time, a compensation payment is to be made to compensate for the MV effect in order to avoid the value transfer described above.

For the conversion, DZ BANK is using the amendment documents provided by BdB and ISDA. For contracts under the German Master Agreement (‘Deutscher Rahmenvertrag‘ or DRV), that could not be switched by year-end 2021, the EU Implementing Regulation mentioned above applies.  

The conversion of the cash collateral interest rate does not automatically lead to a conversion of the variable interest rate agreed in the individual transaction based on a previous reference interest rate. The conversion of the reference interest rate in the individual transactions can and must also be agreed upon in the amendment documentation. (cf. EONIA-OIS)

If you have any questions regarding the conversion of your collateral contracts, please contact your usual contacts at DZ BANK or a contact person named on this page.

Regardless of how you contact us, DZ BANK will contact you in the coming months to discuss the details (date, contractual parameters, amount of compensation payment, etc.) of the contract conversion with you.

Conversion of Overnight Index Swaps (OIS) with reference to EONIA

For existing OIS transactions with an EONIA reference, the coupon payment of the corresponding swap page is to be changed to €STR + 8.5bp. Any other surcharges on this page will remain unchanged. Therefore, no compensation payments are necessary. Pricing and valuation are not affected. Floating legs with a premium are already common market practice today.

For the conversion, DZ BANK is using the amendment instruments provided by BdB and ISDA.

In the past, repo and securities lending agreements were individually structured with regard to the possible collateralisation. This requires a case-by-case assessment and individual coordination of the approach between the counterparty and DZ BANK.

In those cases where EONIA is mentioned as the interest rate for cash collateral, it is to be replaced by €STR (flat) including appropriate successor regulations. Very often securities are also provided as collateral (instead of cash), so that in these cases the necessary adaptation of the wording of the contract has no economic impact.

In many cases, the current account interest is also based on the EONIA fixing (currently calculated as €STR+8.5bp). DZ BANK will convert the affected accounts to a €STR-based fixing in good time. The economic situation should be maintained. If possible, the contracts should be adjusted in the context of forthcoming renewals.