On 27 July 2020 the largest two central counterparties for European interest rate swaps began using the Euro Short Term Rate (€STR) curve.
After a five week delay due to the coronavirus, the largest two central counterparties for European interest rate swaps began using the Euro Short Term Rate (€STR) curve to discount and value those swaps.
This will impact the value and interest sensitivity of many institutional investors’ swap portfolios. For most investors hedging long term interest rate risk, the value of their swap portfolios are likely to increase. The central counterparties are calculating and applying offsetting compensation amounts so that investors are not unduly advantaged or disadvantaged by these changes.
The €STR curve will replace the European Over-Night Index Average (Eonia) rate curve, which has been in use since after the financial crisis in 2008/09 as a standard proxy for a risk-free interest rate curve. Eonia was deemed to be non-compliant with the EU Benchmarks Regulation, introduced in 2018, and is expected to be phased out by the beginning of 2022. Since October 2019, the Eonia fixing rate has been defined as the €STR fixing rate plus a spread of 0.085%.
