CCPs and ESTR clearing

CCPs have announced their plans regarding ESTR swap clearing.

Some plans are described in a Risk.Net article titled "LCH sets €STR swap clearing launch date" (subscription required).

Some of the claims there exhort me to react:

1. On the valuation and margining side, the fixed 8.5 basis point spread between Eonia and €STR means that we think it’s possible to use Eonia as a proxy for €STR as a risk factor. Whitehurst says.
For the valuation, I agree: in October, EONIA will be equal to ESTR+8.5bps, so you can convert from one to the other. For the margin side (initial margin), it seems that they use logic in the wrong direction. You can use ESTR history (that does not exists yet) to predict the future of EONIA (that will soon stop to exists but in the mean time is related to ESTR). You cannot use the EONIA history (that was not linked to ESTR) to predict the future of ESTR (that will start to exists in October). I don't say that it is not possible to use EONIA to get information about the potential future dynamic of ESTER, but the current relation between the two does not help to automatically generate an history dated from when they were not linked.
2. LCH says the nearly three-week gap between the ECB beginning publication of €STR and the launch of clearing is necessary for users to prepare to trade the new instruments.
Why? The launch date (2 October) for ESTR is known since several months. It would have been possible to start trading ESTR swaps several month ago. You could have traded those swaps as forward starting after 2 October or as even spot starting with a "pre-ESTR-launch temporary fallback" to EONIA - 8.50bps. None of those gaps and waiting are necessary, expect if the process and technology are not ready at the CCPs. This is a choice, maybe a forced one, but still a choice by the CCPs, not a financially grounded requirement. You don't need the users to prepare; if they are not prepared, they don't use the ESTR clearing, that's it. The real issue would be that users are ready but the clearing house is not offering the service. Are they sure to no user in the world is ready today to trade ESTR swaps? Again it seems to me that they got the logic in the wrong direction.
3. From October 21, LCH will initially use the recalibrated Eonia curve to discount the present value of €STR swaps and to determine interest rate payments on cash collateral – so-called price alignment interest (PAI) – before eventually switching to €STR ahead of Eonia’s death.
Again, why? ESTR will be the main benchmark and EONIA only a secondary, implied benchmark. Why not using ESTR collateral for ESTR-linked products? I know that it means that you need a process that can handle two PAIs (and related discounting) in parallel and a real multi-curve system for valuation, variation and initial margin. I hope that more than 10 years after the GFC, the most important institutions in the world for derivative clearing have a flexible system and the expertise to do so.


I would suggest to issuers that want a nice free advertisement to launch an ESTR-linked FRN before 2 October with a "pre-ESTR-launch temporary fallback" to EONIA - 8.50bps. Obviously there is not too much time left, and they may find it difficult to find an arrangeur for their issue, but they can contact me for the quantitative finance side... I'm sure they will immediately appear in a Risk.Net article!

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