Euro Discounting

For an introduction to IBOR transition, read this article

In September 2018, the working group on euro risk-free rates, which was set up by the ECB, together with the Financial Services and Markets Authority, the European Securities and Markets Authority and the European Commission, recommended that the euro short-term rate (€STR) replace the euro overnight index average (EONIA) as the new euro risk-free rate.

€STR is a daily overnight benchmark rate developed by the European Central Bank (ECB) based on the previous day’s overnight unsecured fixed rate deposit transactions in euro conducted with financial counterparties and reported by banks to the European System of Central Banks for statistical purposes. The ECB has been publishing €STR since 2 October 2019.

The calculation methodology for EONIA has been modified on 2 October 2019. EONIA’s daily rate is now equal to €STR’s daily rate plus 8.5 basis points (0.0085%), a spread calculated by the ECB as the difference between EONIA and pre-€STR for the one year period up to 16 April 2019.

Certain Central Counterparties (CCPs) including CME Clearing, LCH SwapClear and Eurex Clearing changed their Price Alignment Interest (PAI), Price Alignment Amount (PAA) and discounting curves on all cleared euro-denominated products from EONIA (€STR + 8.5 basis points) to €STR on 27 July 2020 (“the CCP switch”).

This change takes places in the context of the transition from EONIA to €STR and follows recommendations from the working group on euro risk-free rates.

To align with the CCP switch, HSBC Bank plc and HSBC France completed the switch of their discount curves from EONIA to €STR for valuing over-the-counter (OTC) bilateral collateralised single-currency euro-denominated equity derivatives on 27 July 2020 and interest rate derivatives on 17 August 2020.

The impact of this change will depend on a number of factors, including time to maturity for the in-scope trades. You may have to post more (or less) collateral or you may receive more (or less) collateral back from HSBC.

In the meantime, don’t hesitate to contact your Relationship Manager or Sales representative to discuss the wider changes due to the transition away from certain Interbank Offered Rates (IBORs).