Where is ESTR? (4)

This is a follow up on previous post on Where is ESTR?, Where is ESTR? (2), and Where is ESTR? (3).

It has been more than a month that the main CCPs have switch their PAI to ESTR in EUR and it should be the standard now. What do we see in the LCH data? Almost nothing! The monthly volume for ESTR OIS was less than 72 bn (USD equivalent), just  above 1/3 of what is was in January and February (see graph below). Not a very positive trend.

Figure 1: Monthly ESTR volume at LCH.


This means a total volume for ESTR OIS of 705 bn since the start of the year. This is in contrast with the 56 trn in all OIS (EONIA and ESTR). ESTR-linked products are only 1.25% of all overnight-linked products.

This lack of volume confirms my previous analysis that the change of collateral rate would have no impact on the market volume. With the fixed spread, there is no more incentive to switch now that there was two months ago. One can easily hedge the new discounting with the old rate, or the old discounting with the new rate. My original analysis (from before October 2019) was that everybody would switch immediately to ESTR for trading (that proved wrong). But if you don't switch immediately, there is no reason to switch before January 2022. Up to now, that second part seems to be correct.

My ESTR analysis has been reported in a couple of articles in Practice Insight.

Regarding the EONIA to ESTR transition, one detailed had escaped my attention. ISDA has published last October a supplement to the 2006 ISDA definition (supplement number 60) that contains a fallback from EONIA to ESTR+8.5bps. This removes the legal uncertainty for EONIA swaps traded after October 2019 and with maturity beyond January 2022.

This legal certainty for some swaps does not mean that the fallback will be easy. The fallback coupons will be on an overnight rate plus a spread compounded. The composition is on the rate with spread, the spread is inside the overnight composition. A second spread may appear outside the composition, e.g. for basis swaps EONIA v EURIBOR. I don't know of a lot of systems that can handle that double spread, one inside the composition and one outside. We will see how those issues are taken care off in practice in January 2022.

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