Alae Iacta Est
The Rubicon has been crossed, the death sentence is set to be executed on 2 October 2019.
EMMI has decided that EONIA will die on 2 October 2019 with its body occupied by ESTER from then up to end of 2021. To fill the old body that is a little bit larger than the new occupant, it will be padded with some spread. The spread has also already been decided; it will not be adapted to the actual size of both bodies in October. Obviously you need 4 months to compute an average and it would not have been imaginable to have a custom made padding/spread in less than this period. The spread will be 8.5 bps as computed by the ECB.
Now that the death date of EONIA is decided and the spread is decided, trading derivatives on EONIA beyond 2 October 2019 is trading derivatives on a derivative of ESTER; by transitivity of derivatives it is trading a derivative on ESTER. Why are users not trading already directly ESTER (forward starting) derivatives? Why are the CCPs not already accepting ESTER-linked swaps? There is no rational reason for this, just the lack of imagination, preparation, understanding or adequate systems. Trading EONIA long term swaps is dangerous because of the risk of fallback failure. By the way, this risk of failure is an intentional decision embedded in the choice to discontinue EONIA publication on 3 January 2022 (1). Anybody trading an EONIA swap with a maturity beyond 3 January 2022 should justify its action to the operational risk managers of his institution; the risk manager should report it to the board!
(1) In a question time after the presentation of Marco Bianchetti at QuantMinds 2019, I indicated that to my opinion EONIA publication would not be discontinued in January 2022 because it creates serious downside risk without any upside potential. I was proved (once more) wrong. I continue to be surprised when people are ready to short options for free.
EMMI has decided that EONIA will die on 2 October 2019 with its body occupied by ESTER from then up to end of 2021. To fill the old body that is a little bit larger than the new occupant, it will be padded with some spread. The spread has also already been decided; it will not be adapted to the actual size of both bodies in October. Obviously you need 4 months to compute an average and it would not have been imaginable to have a custom made padding/spread in less than this period. The spread will be 8.5 bps as computed by the ECB.
Now that the death date of EONIA is decided and the spread is decided, trading derivatives on EONIA beyond 2 October 2019 is trading derivatives on a derivative of ESTER; by transitivity of derivatives it is trading a derivative on ESTER. Why are users not trading already directly ESTER (forward starting) derivatives? Why are the CCPs not already accepting ESTER-linked swaps? There is no rational reason for this, just the lack of imagination, preparation, understanding or adequate systems. Trading EONIA long term swaps is dangerous because of the risk of fallback failure. By the way, this risk of failure is an intentional decision embedded in the choice to discontinue EONIA publication on 3 January 2022 (1). Anybody trading an EONIA swap with a maturity beyond 3 January 2022 should justify its action to the operational risk managers of his institution; the risk manager should report it to the board!
(1) In a question time after the presentation of Marco Bianchetti at QuantMinds 2019, I indicated that to my opinion EONIA publication would not be discontinued in January 2022 because it creates serious downside risk without any upside potential. I was proved (once more) wrong. I continue to be surprised when people are ready to short options for free.
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