IBOR transition: €STR discounting delays due to coronavirus

It will not come as a surprise to anyone that the coronavirus epidemic is proving to be a headache for the regulator and market participants working to transition away from IBOR benchmarks to new risk-free rates (RFR). Clearing houses (CCP) announced last week they were going to delay the switch from Eonia interest rate benchmark to the euro short-term rate or €STR benchmark and price alignment interest (PAI) by five weeks to 27 July.

According to the minutes of a teleconference of the Working Group of euro RFR, an informal survey among members yielded no consensus for a three-month delay.

However, a postponing was deemed necessary by a majority of members to allow market participants to be ready, and to reduce operational risks. In the same meeting, the working group was presented with a result of a members survey suggesting a delay in the consultation on Euribor fallbacks.

According to the minutes, this would postpone the publication of the results from mid-December 2020 to January 2021.

Opponents to the delay noted that the proximity of the EUR (initially planned for 19 - 22nd June) and USD RFR discount and PAI switches (still due to go ahead on 16-17 October) would make the change a struggle. It is therefore likely that the new date decided by the CCP represents a middle ground between the initial extension and no delay at all.

The industry had pinned its hopes on the discounting and PAI change ‘big bang’ to be a catalyst for €STR swap volumes to pick-up and eventually overtake Eonia swaps. The build-up in €STRS swaps has been slow and we expect that the fall in cleared volumes since mid-march is a reflection of temporary migration towards more liquid products in times of market stress.

As a reminder, the eurozone is not the only jurisdiction where there have been signs of delay in the IBOR transition.

In the UK, the FCA acknowledged that the timeframe of the transition in some market segments, such as loans, was at risk. In the US, the ARRC also said it will keep the impact of the epidemic in mind when setting up its 2020 objective and best practices.