Session 1: The transition from EONIA to the euro short-term rate (€STR) - Q&A
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Gau, Christian
Kozhevnikova, Anna
Pardo, José Carlos
Schmidtchen, Markus
The transition from EONIA to the euro short-term rate (€STR) Q&A session.
 So if I may start here, please stand up, mention your name and your institution. Thank you. Thank you. Good morning. This is Emilio Gamarra from VMA Clearing in Spain. Well, first of all, thank you to all the panelists for your speeches. I'd like to ask, because probably in the recommendations of the paper of the ECB, it could be a very technical question. I'd like to know, or I'd like you to highlight or make a clarification about which is the curve that we are going to shift to move forward to recalibrate from October the 2nd with the eight and a half basis point spread. We almost know that it's the silhouette curve, but some people is still thinking that we are going to move the par rate, the only par rate. So I'd like to clarify you, which is the right curve that we are going to move, because probably some participants have still the doubt about the movement that we are going to do. Thank you. Thank you. I'll now maybe... So let me start. So basically, I think in the report we've been laying out kind of the group of curves, actually, that is possible to be used for variation purposes. You see that being part of that report. But actually on that particular day, what's happening is that the unit is being recalibrated. So from my point of view, the continuation of the use of your curves that currently points towards the unit, automatically moves towards a recalibrated unit afterwards. So that is in place already. You have that. So now at the very moment in time that you start to engage in doing S-ser transactions. So that's when for you now you need to actually just determine, well, what is the S-ser curve that I'm going to be using to perform a variation for that particular group of products. And that's when you're basically going to have at minimum two curves, so potentially. So that will be linked as we all know. But those two curves will then be kind of relevant for the individual participant. So I think therefore this is more a stepped approach. So the unit curve itself that you're currently using on the first day, it is kind of due to the recalibration, it is automatically being brought in line with the change that we are implementing here. Any other comments? Okay. Other questions? Yes, please. Over here. You have a Russian B&G Bank, Netherlands. Thank you for your time and your explanation. I had one question about valuation. You talk about that some nonlinear instruments will be affected, but aren't all SOP instruments nonlinear as of now? And that because if they are quite long, there is a real possibility that they're going to switch to fallback rate. So if we have to switch, then basically they are saying something about another rate, right? That's a good point in time. Yeah, we're not talking about a transition yet of let's say the floating rate option for a long-term interest rate swap. So we haven't kind of touched upon that one. But interest rate swaps are all, let's say all derivatives are being affected by the change due to the discounting curve. So due to kind of the way that collateralization of exposure from derivatives is being implemented through CSA contracts and the use of the corresponding in these contracts as a price alignment interest as well as for the construction of the discounting curve. And that's why all of these derivatives are affected. I do totally agree with you. Whether this is all nonlinear, I'm not sure I did get that one. Because if you have just an ordinary swap contract, right, as of now, suppose you look at the 30 years of maturity, so basically it's your ribor six months, for example. So what is actually, what you're going to be exchanging, you're going to be exchanging fixed rate against your ribor six months at a certain period. And there is a real possibility that at a certain point in time, which we don't know, some stochastic time, T star is going to switch to alternative rate, which we don't know. Yes. So basically that makes it quite nonlinear to me, right? I'm not sure whether it's, or we describe it as nonlinear, but it's surely something that we haven't been covering in here so far. That's for sure. So I think that kind of has become more of a topic when we talk about the creation of a fallback solution for your ribor. But on the other hand, please keep in mind that we don't talk about the discontinuation of your ribor at the moment. So all the, where we'll be, basically what we'll be doing is we will be recommending a fallback rate for your ribor. We're not recommending your ribor to being discontinued in any shape or form. Let's keep that in mind. So that's at least kind of current stance of the working group. Your ribor is going to continue. There will be a fallback. And that's as far as it goes for us at the moment. So. Yeah, okay. I'm sure where they answered your question. Maybe I will ask afterwards a little question. Okay. Okay. So the question's over here, second row. Microphone is coming. Hi. Jarrod Jacob from Park Fitzgerald. Question from Marcus on legal terminology. You'd said that the fallback for you, Eonia was ester plus affixed 8.5 basis point spread. Is it not the case that the Eonia methodology is formally changing to ester plus and 8.5 fixed spread? So the case around fallbacks is very different. Yeah. Well, well, I guess the question is for me. The checker. At any way, the next next week, the Eonia will change the methodology to become a step of 8.5 basis points. And then if you need to embed a fallback provision and a fallback rate in new Eonia contracts, which minimize any kind of value transfer at the cessation of Eonia, this fallback rate would be a EUROSTR plus 8.5 basis point from a legal standpoint. It's a different index because one is Eonia and the other one is EUROSTR. So it's the same. And that's why and also we officially recommend it because in some, for example, in the Isla Maas in the Isla Bezmar supplement, it includes as a fallback rate the rate officially nominated by a working group sponsored by a central bank. So that's why we need, we don't need, the working group needs to recommend any fallback rate because this would help to apply in other master agreements which the market is used. But the same is the same. We could take one final question up here in front. Thanks. Paul Allen. I know this is a quick question, hopefully. You mentioned that when EONOS actually discontinued entirely, discounting and collateral payments would go to just S to flat unless there's frictions. The friction you're talking about, is that just a large compensation payment for the movement of value or what are the other things you were thinking of? It's the organization of that. So you would have kind of all your agreements in place. So first of all, with your CCP, I think it's probably kind of easier to organize as this is usually well standardized and well organized. But then you have a probably large amount of individual contracts with a large range of individual customers. Who would you have to engage with them? You would have to deal with that. So therefore, changing that rate, or making that switch is probably just a more tedious effort. So it's quite an organizational effort to go through all of that. And that's why we originally made that differentiation, basically saying we recommend a big bang for everything that is going by the central counterparty platforms. But at the same time, we said a phased approach might be required for everything that is bilateral and that is due to the very nature of the individual contracts and how to renegotiate that. Thanks. Okay. I'm afraid we have to close this very first panel. So thanks very much to all the panelists. We will now have a coffee break for half an hour. So we'll resume at 10 past 11. And I'm sure the panelists will be happy to answer more questions. So, of course. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
 So if I may start here, please stand up, mention your name and your institution.  Thank you.  Thank you.  Good morning.  This is Emilio Gamarra from VMA Clearing in Spain.  Well, first of all, thank you to all the panelists for your speeches.  I'd like to ask, because probably in the recommendations of the paper of the ECB, it could be a very  technical question.  I'd like to know, or I'd like you to highlight or make a clarification about which is the  curve that we are going to shift to move forward to recalibrate from October the 2nd  with the eight and a half basis point spread.  We almost know that it's the silhouette curve, but some people is still thinking that we  are going to move the par rate, the only par rate.  So I'd like to clarify you, which is the right curve that we are going to move, because  probably some participants have still the doubt about the movement that we are going  to do.  Thank you.  Thank you.  I'll now maybe...  So let me start.  So basically, I think in the report we've been laying out kind of the group of curves,  actually, that is possible to be used for variation purposes.  You see that being part of that report.  But actually on that particular day, what's happening is that the unit is being recalibrated.  So from my point of view, the continuation of the use of your curves that currently points  towards the unit, automatically moves towards a recalibrated unit afterwards.  So that is in place already.  You have that.  So now at the very moment in time that you start to engage in doing S-ser transactions.  So that's when for you now you need to actually just determine, well, what is the S-ser curve  that I'm going to be using to perform a variation for that particular group of products.  And that's when you're basically going to have at minimum two curves, so potentially.  So that will be linked as we all know.  But those two curves will then be kind of relevant for the individual participant.  So I think therefore this is more a stepped approach.  So the unit curve itself that you're currently using on the first day, it is kind of due  to the recalibration, it is automatically being brought in line with the change that  we are implementing here.  Any other comments?  Okay.  Other questions?  Yes, please.  Over here.  You have a Russian B&G Bank, Netherlands.  Thank you for your time and your explanation.  I had one question about valuation.  You talk about that some nonlinear instruments will be affected, but aren't all SOP instruments  nonlinear as of now?  And that because if they are quite long, there is a real possibility that they're going to  switch to fallback rate.  So if we have to switch, then basically they are saying something about another rate, right?  That's a good point in time.  Yeah, we're not talking about a transition yet of let's say the floating rate option  for a long-term interest rate swap.  So we haven't kind of touched upon that one.  But interest rate swaps are all, let's say all derivatives are being affected by the  change due to the discounting curve.  So due to kind of the way that collateralization of exposure from derivatives is being implemented  through CSA contracts and the use of the corresponding in these contracts as a price  alignment interest as well as for the construction of the discounting curve.  And that's why all of these derivatives are affected.  I do totally agree with you.  Whether this is all nonlinear, I'm not sure I did get that one.  Because if you have just an ordinary swap contract, right, as of now, suppose you look  at the 30 years of maturity, so basically it's your ribor six months, for example.  So what is actually, what you're going to be exchanging, you're going to be exchanging  fixed rate against your ribor six months at a certain period.  And there is a real possibility that at a certain point in time, which we don't know,  some stochastic time, T star is going to switch to alternative rate, which we don't know.  Yes.  So basically that makes it quite nonlinear to me, right?  I'm not sure whether it's, or we describe it as nonlinear, but it's surely something  that we haven't been covering in here so far.  That's for sure.  So I think that kind of has become more of a topic when we talk about the creation of  a fallback solution for your ribor.  But on the other hand, please keep in mind that we don't talk about the discontinuation  of your ribor at the moment.  So all the, where we'll be, basically what we'll be doing is we will be recommending  a fallback rate for your ribor.  We're not recommending your ribor to being discontinued in any shape or form.  Let's keep that in mind.  So that's at least kind of current stance of the working group.  Your ribor is going to continue.  There will be a fallback.  And that's as far as it goes for us at the moment.  So.  Yeah, okay.  I'm sure where they answered your question.  Maybe I will ask afterwards a little question.  Okay.  Okay.  So the question's over here, second row.  Microphone is coming.  Hi.  Jarrod Jacob from Park Fitzgerald.  Question from Marcus on legal terminology.  You'd said that the fallback for you, Eonia was ester plus affixed 8.5 basis point spread.  Is it not the case that the Eonia methodology is formally changing to ester plus and 8.5  fixed spread?  So the case around fallbacks is very different.  Yeah.  Well, well, I guess the question is for me.  The checker.  At any way, the next next week, the Eonia will change the methodology to become a step  of 8.5 basis points.  And then if you need to embed a fallback provision and a fallback rate in new Eonia  contracts, which minimize any kind of value transfer at the cessation of Eonia, this fallback  rate would be a EUROSTR plus 8.5 basis point from a legal standpoint.  It's a different index because one is Eonia and the other one is EUROSTR.  So it's the same.  And that's why and also we officially recommend it because in some, for example, in the Isla  Maas in the Isla Bezmar supplement, it includes as a fallback rate the rate officially nominated  by a working group sponsored by a central bank.  So that's why we need, we don't need, the working group needs to recommend any fallback  rate because this would help to apply in other master agreements which the market is used.  But the same is the same.  We could take one final question up here in front.  Thanks.  Paul Allen.  I know this is a quick question, hopefully.  You mentioned that when EONOS actually discontinued entirely, discounting and collateral payments  would go to just S to flat unless there's frictions.  The friction you're talking about, is that just a large compensation payment for the  movement of value or what are the other things you were thinking of?  It's the organization of that.  So you would have kind of all your agreements in place.  So first of all, with your CCP, I think it's probably kind of easier to organize as this  is usually well standardized and well organized.  But then you have a probably large amount of individual contracts with a large range  of individual customers.  Who would you have to engage with them?  You would have to deal with that.  So therefore, changing that rate, or making that switch is probably just a more tedious  effort.  So it's quite an organizational effort to go through all of that.  And that's why we originally made that differentiation, basically saying we recommend a big bang  for everything that is going by the central counterparty platforms.  But at the same time, we said a phased approach might be required for everything that is bilateral  and that is due to the very nature of the individual contracts and how to renegotiate  that.  Thanks.  Okay.  I'm afraid we have to close this very first panel.  So thanks very much to all the panelists.  We will now have a coffee break for half an hour.  So we'll resume at 10 past 11.  And I'm sure the panelists will be happy to answer more questions.  So, of course.  Thank you.  Thank you.  Thank you.  Thank you.  Thank you.  Thank you.  Thank you.
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