On 13 March 2020, the European Central Bank (ECB) working group on euro risk-free rates launched a public consultation on whether to issue recommendations to address specific issues for swaption products as a result of the proposed transition from EONIA to the euro short-term rate (€STR).

The central counterparty (CCP) discounting switch from EONIA to the €STR, planned for June 2020, will raise specific issues for swaption products. If the exercise date of these contracts is after the CCP transition date, their valuation may change as a result of the discounting switch from EONIA to the €STR. However, the CCP compensation mechanism will not apply to them because the contracts are bilateral, not cleared, on the transition date.

The purpose of the public consultation is to give interested parties the opportunity to provide feedback to the ECB working group on euro risk-free rates as to whether it should issue recommendations regarding the voluntary exchange (or lack thereof) of cash compensation between bilateral counterparties to swaption contracts impacted by the CCP discounting switch from EONIA to the €STR.

The deadline for comments on the ECB consultation is 3 April 2020.

While the consultation only focuses on euro-denominated contracts, a similar consultation is being carried out by the US Alternative Risk-free Rate Committee for contracts denominated in US dollars containing similar statements and questions to allow market participants to respond in a consistent way.