Eonia

Title: The Euro Overnight Index Average (EONIA) — What It Was, How It Worked, and How to Transition to €STR

Key takeaways
– EONIA (Euro Overnight Index Average) was the benchmark overnight interbank rate for unsecured euro lending among large European banks.
– EONIA reflected the weighted average of actual overnight loans reported by a panel of banks and was used as a reference in money-market products and some financial contracts.
– Regulatory reform and a move to a more transaction-based, robust benchmark led to the introduction of the Euro Short-Term Rate (€STR, often written ESTER) and the replacement of EONIA.
– From October 2019 through December 2021 EONIA was published as €STR plus a fixed spread (8.5 basis points) for continuity; EONIA was discontinued effective January 3, 2022.
– Market participants should identify legacy EONIA exposures, apply appropriate fallbacks or amendments to contracts, adjust systems and valuation models, and communicate with counterparties and clients.

1. What was EONIA?
– Definition: EONIA was the overnight unsecured interbank lending rate in euros — the average rate at which European banks with surplus funds lent to banks needing cash overnight.
– Role: It served as an interbank reference rate for one-day loans and was referenced in some money-market instruments and contracts.
– Panel and calculation (historical): EONIA reflected the weighted average of overnight unsecured lending reported by a panel of banks (the historical description used 28 panel banks). Over time, reforms changed calculation and publication arrangements ahead of discontinuation.

2. How EONIA worked (mechanics and context)
– Overnight borrowing/lending: Banks have regulatory reserve obligations and daily cash-flows that can leave them short or in surplus at day-end. Those short can borrow overnight from those with surpluses; the market rate for these one-day loans is the overnight rate.
– Weighted average: EONIA was published daily as a weighted average of the reported overnight transactions (or submissions) among panel banks, reflecting actual interbank activity in the euro area money market.
– Use cases: Price-setting for short-term products, internal treasury benchmarks, fallback references in longer-dated products, and as an input in risk models or valuation routines.

3. EONIA vs. EURIBOR (key differences)
– Maturity: EONIA was strictly an overnight rate. EURIBOR (Euro Interbank Offered Rate) is reported for multiple maturities — from one week up to 12 months — with a separate rate for each tenor.
– Panel size and administration: Historically different panels and administrators manage the two benchmarks (EURIBOR is associated with the European Money Markets Institute and uses a different panel and administrator).
– Use: EURIBOR is more widely used for retail and corporate lending with various tenors (e.g., mortgages, loans), while EONIA was focused on overnight unsecured rates.

4. Why EONIA was replaced: the move to €STR
– Motivation: Following benchmark scandals and a general industry push for more transaction-based, robust, and reproducible reference rates, the Eurosystem and private-sector working groups sought a euro risk‑free rate based on a broad set of actual transactions.
– €STR (Euro Short-Term Rate): Launched by the ECB in October 2019, €STR reflects the wholesale euro unsecured market and is based on a larger set of underlying transactions than EONIA. It is administered and published by the ECB.
– Transition mechanics: To ensure continuity while markets migrated, EONIA was effectively recalibrated to be €STR + 8.5 basis points from October 2019 until its discontinuation. The formal discontinuation date for EONIA was January 3, 2022, after which market participants were expected to use €STR or other appropriate benchmarks.

5. Practical steps — What organizations should do now
Below are practical, prioritized steps for firms with historical or remaining EONIA-linked exposure, or that need to ensure systems and contracts reference robust euro short-term benchmarks going forward.

Immediate (inventory & risk assessment)
1. Identify exposures:
– Generate a complete inventory of contracts, products, systems, and models referencing EONIA (loans, swaps, bonds, money-market instruments, internal hedges, IT feeds).
2. Categorize by criticality and volume:
– Rank exposures by notional, cash-flow impact, legal complexity, and accounting/tax relevance.
3. Check fallback provisions:
– For each contract, review legal language for fallback/default rate clauses and determine whether they reference €STR or other fallbacks. Determine whether fallbacks are robust, economically reasonable, and executable.

Short-to-medium term (contract remediation & valuation)
4. Remediation strategy:
– Where fallbacks are absent or inadequate, plan bilateral amendments, novations, or use protocol-based fixes (e.g., ISDA fallbacks for derivatives where applicable). Prioritize high-value and high-risk contracts.
5. Decide on spread adjustments:
– For legacy EONIA instruments that require conversion, adopt the industry-accepted methodology for converting to €STR plus a spread (the official reconciliation used a fixed spread of 8.5 basis points during the transition for continuity). Legal counsel should confirm the appropriate spread method for each contract.
6. Re-price and hedge:
– Revalue affected products using €STR-based curves and adjust hedges and capital/risk metrics accordingly. Report P&L and reserve impacts.

Systems, liquidity, and operational readiness
7. Update systems and market data:
– Replace EONIA data feeds with €STR. Ensure front-to-back systems, pricing engines, accounting, collateral management, and liquidity forecasting use the new reference where appropriate. Run parallel checks and reconciliation.
8. Test systems and processes:
– Conduct model validation, reconciliation tests, and end-to-end testing for transaction booking, margining, and settlement using €STR.
9. Update treasury and funding strategies:
– Reassess liquidity planning and intraday/overnight funding policies given the new benchmark and potential changes in money-market behavior.

Legal, governance and communication
10. Amend documentation:
– Work with legal and compliance to execute required amendments or protocols and to document the basis for any applied spread adjustments or fallback choices.
11. Communicate:
– Inform counterparties, clients, internal stakeholders, auditors, and regulators about transition plans and impacts. Provide timelines and explain operational changes.
12. Governance:
– Establish/confirm an internal working group to oversee transition tasks, signoffs, and timelines (legal, treasury, trading, risk, IT).

Market practices and valuation considerations
13. Risk models and discounting:
– Update discounting and forecasting curves to use €STR where the product economics require a near risk-free overnight rate. Recalibrate risk models and scenario tests.
14. Accounting and tax:
– Assess potential accounting (e.g., hedge accounting) and tax consequences of contract changes; consult auditors and tax advisors early.
15. Monitor liquidity, basis and market behavior:
– Post‑transition, monitor basis spreads between €STR, EURIBOR, and other money-market rates; unexpected basis moves can affect hedges and funding costs.

6. Impact by product type (high level)
– Loans and mortgages: Most retail mortgages reference EURIBOR; corporate loans that referenced EONIA should be remediated to €STR with an agreed spread or other contractual fallback.
– Derivatives: ISDA produced fallback protocols for LIBOR; for euro markets, legacy EONIA swaps required documentation changes to move to €STR-based fallback rates. Check ISDA and local derivatives market guidance.
– Money-market funds and short-term instruments: Funds that used EONIA for NAVing or performance should have migrated to €STR or rerated benchmarks; update prospectuses and investor communications.
– Collateral/margining: Cash variation margin and collateral interest calculations referencing EONIA needed agreement on alternative rates (typically €STR).

7. Common FAQs
– Is €STR the same as ESTER? €STR is the ECB’s Euro Short-Term Rate; “ESTER” is an alternate spelling sometimes used, but the official name and ticker is €STR.
– Was EONIA eliminated overnight? No — regulators coordinated a transition: €STR launched in October 2019 and EONIA was published as €STR + 8.5 bps through the end of 2021; EONIA was discontinued beginning January 3, 2022.
– Should I switch to €STR if my product references EURIBOR? Not necessarily — EURIBOR and €STR serve different purposes (tenor vs overnight). Use the benchmark specified in contract, and consider fallback provisions or repricing if required.

8. Final checklist (concise)
– Inventory all EONIA references.
– Review contract fallbacks and legal terms.
– Prioritize remediation by financial/material impact.
– Agree conversion methodology (e.g., €STR + spread) and execute amendments.
– Update pricing, valuation, and risk models; test thoroughly.
– Update systems and market data feeds to €STR.
– Communicate with stakeholders, counterparties, and regulators.
– Monitor post-transition market dynamics.

References and further reading
– European Central Bank — “What Is the Transition from EONIA to €STR (€uro Short-Term Rate)” (ECB transition guidance).
– The European Money Markets Institute (EMMI) — pages on EONIA and EURIBOR.
– Euribor — “What Is Euribor” and current EURIBOR rates.
– Industry guidance (ISDA and national authorities) on fallbacks and transition protocols.

(For exact texts of legal fallbacks, the official ECB, EMMI and ISDA publications should be consulted, and legal counsel engaged for contract amendments.)

(Continuing from previous sections)

Transition timeline and regulatory background
– 2018: The ECB convened the Private Sector Working Group on euro risk-free rates to recommend a robust euro risk-free rate.
– October 2019: The new rate, the Euro Short-Term Rate (€STR, pronounced “ester”), began publication by the ECB. On the same date, EMMI (the European Money Markets Institute) redefined EONIA as €STR plus a fixed spread of 8.5 basis points (0.085%) to ease transition and permit market continuity.
– End of 2021 / January 3, 2022: EONIA was discontinued as a separately published benchmark. Market participants were expected to adopt €STR (or an appropriate €STR-based term or compounded rate) for new contracts and migrate legacy contracts where feasible.

Why the change matters
– Robustness and transaction basis: €STR is based on a broader set of actual wholesale euro money market transactions reported to the ECB, making it a more transaction‑based and resilient benchmark than predecessor quote-based rates.
– Reduced manipulation risk: The move aligns with global reforms away from quote-based interbank offered rates following past manipulation scandals.
– Market plumbing: Interest-rate curves, discounting conventions, collateral agreements, and many contracts historically tied to interbank rates had to be updated. That affects pricing, risk management, accounting, and legal documentation.

How €STR differs from EONIA and EURIBOR (recap + nuance)
– EONIA: Historically an unsecured overnight rate derived from panel banks’ interbank lending; redefined in 2019 as €STR + 8.5 bps and discontinued as a distinct benchmark in Jan 2022.
– €STR: An overnight rate published by the ECB based on wide coverage of overnight unsecured wholesale transactions. It is intended to be the euro risk-free rate (RFR) for the euro money market.
– EURIBOR: A set of term unsecured rates (1 week to 12 months) reflecting benchmark offered rates by contributing banks used for many loans and consumer products. EURIBOR remains in use as a term bank reference rate and is administered separately (EMMI/Global Rate Set Systems Ltd. per governance arrangements).

Practical steps for market participants (what treasurers, lenders, and counterparties should do)
1. Inventory and identify exposures
– Locate all contracts, derivatives, loans, bonds, and operational systems that reference EONIA (or EURIBOR) directly or indirectly.
– Include cash products, consumer mortgages, corporate loans, ISDA/CSA agreements, collateral agreements, and internal pricing algorithms.

2. Review contractual language and fallback provisions
– Check if contracts contain robust fallback language that specifies a replacement rate for EONIA, and whether it references €STR or a spread-adjusted replacement.
– If fallback language is weak or absent, plan for amendments or negotiations to define the replacement rate and spread.

3. Decide on replacement convention
– For overnight indexed products, adopt €STR (often with a spread adjustment when replacing historical EONIA references).
– For term financing and loans that need forward-looking term rates, consider using a term €STR (if and when robust term rates are available) or structure products around compounded-in-arrears €STR rates.
– For legacy EONIA contracts, many market participants adopted €STR + 8.5 bps (the fixed spread used when EONIA was redefined) as the mechanical transition rate; legal confirmation is still necessary.

4. Implement systems and accounting changes
– Update front-, middle-, and back-office systems to retrieve €STR in the desired format (overnight published at around 08:00 CET by the ECB).
– Adjust pricing models and curve-building frameworks (use compounding conventions if products reference compounded overnight rates).
– Coordinate with treasury and finance teams to re-document hedge effectiveness and accounting impacts.

5. Manage valuation and basis risk
– Recognize that replacing EONIA with €STR (or €STR-based term rates) can create basis mismatches with products linked to other rates (EURIBOR, other currencies’ RFRs).
– Consider hedging basis exposure, or restructuring cash flows if necessary.

6. Legal and documentation governance
– Work with legal counsel to amend contracts, confirm fallback clauses, and consider industry templates (e.g., ISDA IBOR Fallbacks supplement and protocols — for derivatives — and loan amendment templates provided by industry associations).
– Document board approvals and sign-off for amended benchmark conventions.

Concrete examples

Example 1 — How overnight weighted-average rates are calculated (simple hypothetical)
Suppose three interbank overnight unsecured loans are reported for the day:
– Bank A lends €200 million at 0.01% overnight.
– Bank B lends €150 million at 0.02% overnight.
– Bank C lends €50 million at 0.00% overnight.

Weighted average rate = (200m × 0.0001 + 150m × 0.0002 + 50m × 0.0000) / (200m + 150m + 50m)
= (20,000 + 30,000 + 0) / 400,000,000
= 50,000 / 400,000,000 = 0.000125 = 0.0125% (overnight)

This illustrates the arithmetic-weighted average approach typical of overnight reference rates (actual EONIA and €STR methodologies include reporting and trimming rules; the example is illustrative).

Example 2 — Replacing EONIA in a legacy loan
Loan A references EONIA + 25 bps. The loan has no robust fallback. Steps:
– Negotiate with the borrower to amend the loan documentation to reference €STR + 8.5 bps + 25 bps = €STR + 33.5 bps (or another mutually agreed spread).
– Update payment mechanics: since €STR is published daily, define whether the loan interest will be calculated using compounded €STR in arrears or a simpler overnight replacement.
– Document the change, obtain signatures, and update accounting/hedging positions.

Example 3 — Using compounded-in-arrears €STR (typical for cash products)
Many cash products require a term equivalent rate. If no forward-looking term €STR is available, parties use compounded €STR:
– Interest for a 3‑month period = Notional × (product over days (1 + €STR_day × daycount_fraction) − 1)
– Then annualize or apply actual/360 as per contract.

This requires:
– Clear definition of calculation methodology (compounding convention, business day adjustments).
– Publication of the compounded rate and the look-up/fixing day for the payment.

Common operational and risk-management considerations
– Timing and publication: €STR is published by the ECB each TARGET business day at 08:00 CET. Systems should be aligned to capture the rate and apply it for interest calculation and settlement.
– Data vendor setups: Ensure market data vendors and internal databases supply €STR history and current values.
– Spread methodology: For legacy EONIA to €STR conversions, the fixed 8.5 bps spread was used when EONIA was redefined; however, any contractual change should be legally confirmed.
– Hedging: Interest-rate swaps and other derivatives referencing EONIA must be transitioned according to ISDA protocols or bilaterally amended to reference €STR (plus any agreed spread). Be mindful of potential P&L impact from novations or amendments.

Regulatory, accounting, and tax impacts
– Accounting: Changes in benchmark rates can affect hedge accounting (effectiveness testing) and valuation reserves; consult accounting advisors and auditors when amending large volumes of contracts.
– Regulatory reporting: Some reporting frameworks expect consistent indexing; ensure reports use the updated benchmark where required.
– Tax: Changes to payment amounts or timing may have tax implications in some jurisdictions.

Where to get official guidance and reference materials
– European Central Bank (ECB) — publications on €STR methodology, transition from EONIA, and related market guidance.
– European Money Markets Institute (EMMI) — historical EONIA information and EURIBOR governance.
– Euribor administrative body — documentation on EURIBOR (relevant where EURIBOR products are being compared or amended).
– ISDA — fallback protocols and supplements for derivatives referencing IBORs and overnight rates.

Concluding summary and practical checklist
Summary:
– EONIA was the historical overnight interbank rate in euros; regulatory reform and market robustness concerns led to its replacement by the ECB-published €STR.
– €STR is a transaction‑based overnight rate intended to serve as the euro risk‑free rate; markets transitioned away from EONIA (which had been redefined as €STR + 8.5 bps in 2019) and stopped separately publishing EONIA at the start of 2022.
– The transition affects many financial contracts and requires careful operational, legal, accounting, and risk-management work.

Practical checklist for institutions:
1. Inventory contracts referencing EONIA (and other benchmarks).
2. Review fallback clauses—identify gaps that require amendment.
3. Decide replacement mechanics (€STR, compounded €STR, term €STR, and any spread).
4. Amend documentation and obtain necessary consents.
5. Update pricing, risk systems, and data feeds to €STR conventions.
6. Reassess hedging programs for basis and valuation risk.
7. Coordinate with auditors, tax, and compliance teams.

If you need, I can:
– Produce sample amendment language for loan or swap documentation.
– Walk through a worked numerical example of compounding €STR for a given period.
– Help draft a transition project plan tailored to your organization’s size and product mix.

Sources
– European Central Bank. “What Is the Transition from EONIA to €STR (€uro Short-Term Rate).”
– The European Money Markets Institute. “Eonia.”
– Euribor. “What Is Euribor,” and “Current Euribor Rates.”
– The European Money Markets Institute. “About the Institute” and “EURIBOR: Panel Banks.”
– European Central Bank. “Private Sector Working Group on Euro Risk-free Rates Recommends €STR as Euro Risk-free Rate.”

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