Eonia Collateral Agreement Protocol: What You Need to Know

The European Interbank Offered Rate (Eonia) is a benchmark interest rate that is widely used in the Eurozone. In 2019, the European Central Bank (ECB) announced that Eonia would be phased out and replaced with the new Euro Short-Term Rate (€STR). This change has implications for the collateral used in financial transactions, which is where the Eonia Collateral Agreement Protocol comes into play.

What is the Eonia Collateral Agreement Protocol?

The Eonia Collateral Agreement Protocol is a standardized document that outlines how collateral will be valued and exchanged in financial transactions that use Eonia as a benchmark rate. The protocol was developed by the International Swaps and Derivatives Association (ISDA) in consultation with market participants and regulators.

Why is the protocol necessary?

The transition from Eonia to €STR has implications for the value of collateral used in financial transactions. This is because the two rates have different characteristics. Eonia is an overnight rate that is calculated based on actual transactions on the interbank market. €STR, on the other hand, is a risk-free rate that is based on transactions in the wholesale unsecured euro money market.

As a result, collateral that is valued using Eonia may have a different value when valued using €STR. This could create uncertainty and potentially lead to disputes between market participants. The Eonia Collateral Agreement Protocol aims to provide a standardized framework for valuing collateral during the transition period.

How does the protocol work?

The protocol allows market participants to agree on a methodology for valuing collateral that takes into account the transition from Eonia to €STR. It also provides a mechanism for adjusting the value of collateral in the event that the transition leads to a change in the value of the collateral.

Market participants can incorporate the protocol into their existing agreements by including a reference to it in their collateral documentation. This will allow them to benefit from the standardized framework for valuation and adjustment of collateral.

Conclusion

The phasing out of Eonia and the introduction of €STR has implications for the collateral used in financial transactions. The Eonia Collateral Agreement Protocol provides a standardized framework for valuing and exchanging collateral during the transition period. Market participants should consider incorporating the protocol into their collateral documentation in order to benefit from the standardized framework and avoid potential disputes.