The EONIA Guarantee Protocol provides market participants with an effective way to amend the terms of certain ISDA guarantee contracts to include a decline to €STR plus 8.5 basis points after the end of EONIA. The data submitted to the Euro Working Group indicate that a significant number of EONIA referencing agreements remain in place without adequate back-up arrangements and should be updated. The EONIA Protocol provides market participants with a mechanism to implement these updates. For example, ancillary agreements under new York or England and Wales law involving a non-EU entity do not fall within the scope of Article 23a. The guarantee contracts published by ISDA (including, inter alia, the 2016 Credit Support Annex for the Margin of Variation (VM) and the 1995 ISDA Credit Support Annex) concluded between the two parties are documents provided by protocol for the purposes of the EONIA Protocol. The full list of documents covered by the Protocol can be found in the EONIA Protocol. In addition, ISDA has published two bilateral amendment templates that allow parties to update EONIA references in a wider range of derivative documents, including transaction confirmations, accompanying documents and framework agreements. A wider range of change options is also offered, including fallback solutions at €STR stable and €STR plus 8.5 basis points. Even if these are ancillary agreements between two EU-based entities, it is not clear whether the laws in force in some jurisdictions would be considered an orderly liquidation of EONIA (since EONIA would not fall within the scope of the strict inheritance of New York or the United Kingdom).
In the absence of a general legal solution, the market-based remedy for the abandonment of EONIA for the many CSAs subject to English or New York law is the ISDA 2021 EONIA Collateral Agreement Fallbacks Protocol (the Protocol). If both parties to an EONIA-related CSA accede to the Protocol, then the CSA would be considered amended as follows: While the European Commission`s decision to exercise its “strong legacy” powers under Article 23a of the EU BMR is a welcome development and is part of the broader transition efforts of the derivatives market, market participants should note that the decision does not apply to all collateral arrangements. This definition of EONIA (Collateral Rate) provides that on 3 January 2022 (or an earlier date when it will be announced that EONIA will no longer be available), the relevant interest rate is €STR plus a spread of 8.5 basis points (reflecting the existing EMMI methodology for the calculation of EONIA, as mentioned above). The definitions of guarantee rates also offer fallback solutions that apply when €STR is no longer available. Signatories to the EONIA Protocol should ensure that they are comfortable with the number of treaties falling within the scope of the EONIA Protocol. In particular, the parties should consider whether €STR plus a spread of 8.5 basis points is the appropriate replacement rate in the context of certain collateral arrangements. As with similar protocols published by ISDA, market participants can adhere to the EONIA protocol as agents for multiple clients. ISDA has already published documents allowing the parties to amend the accompanying documents bilaterally. These bilateral documents include version 1.0 of the definitions of interest rates of guarantee contracts (with the definitions of EONIA and €STR) and version 2.0 of the definitions of interest rates of guarantee agreements (which cover a wider range of interest rates). By including these definitions in collateral arrangements, the parties may include standardized definitions in their collateral arrangements with fallback solutions that apply when the relevant interest rate is permanently interrupted or temporarily unpublished. EONIA is a particularly important interest rate for the OTC derivatives market, as it is the most commonly used interest rate when euro cash collateral falls under an ISDA Credit Support Annex (CSA).
The importance of the disappearance of the EONIA is not only that the interest rate to be paid under an affected CSA no longer exists and must therefore be replaced. It is also true that the CSA interest rate is the interest rate to be discounted when assessing the cash flows of derivatives subject to it. On August 18, the International Swaps and Derivatives Association, Inc. (ISDA) the Fallback Protocol of the EONIA GUARANTEE AGREEMENT ISDA 2021 (the Protocol) and opened it to accession. The Protocol provides a mechanism for market participants to amend, inter alia, the terms of certain former ISDA guarantee contracts relating to EONIA to include a decline to €STR plus 8.5 basis points after the end of EONIA. Please read more about this in our linked note below. For more information about the ISDA 2021 EONIA Collateral Agreement Fallbacks Protocol, please contact us. The EONIA Protocol is a multilateral amendment mechanism that allows market participants to replace references to the average of the European Overnight Currency Index (“EONIA”) in their guarantee agreements with references to the euro short-term interest rate (“€STR”) plus a spread of 8.5 basis points.
The change in the reference interest rate will take effect when the EONIA is published on the 3rd. End of January 2022. The EONIA protocol also includes fallback solutions in contracts falling within the scope that apply in the event of a permanent shutdown of €STR. On 3 August 2021, the European Commission published a consultation on a draft delegated act1 setting the STR plus a gap of 8.5 basis points as the legal replacement rate for EONIA under Article 23a of the EU BMR (which imposes the “hard legacy” powers of the European Commission). This follows the “Recommendation on the EONIA Legal Action Plan on €STR”, as set out in a letter addressed to the European Commission by the Chair of the EUR Working Group on Risk-Free Rates. ISDA has compiled this list of frequently asked questions to help you review the isDA 2021 EONIA Collateral Agreements Fallbacks Protocol (the Protocol). If the parties have already amended an ancillary agreement that would otherwise fall within the scope of the EONIA Protocol to include fallback solutions with respect to EONIA, that ancillary agreement does not fall within the scope of the EONIA Protocol. .