EURO STOXX 50® Total Return Futures and EURO STOXX 50® Index Variance Futures: Amendments related to the introduction of the euro short-term rate (€STR)

1. Introduction

The Management Board of Eurex Deutschland and the Executive Board of Eurex Frankfurt AG took the following decisions: 

• With effect from 30 September 2019:
  Amendment of the trading hours for EURO STOXX 50^® Index Total Return Futures;

• With effect from 2 October 2019:
  Adjustment of the Funding Rate for Index Total Return Futures and the risk-free overnight rate for Variance Futures.

The amendments being introduced are due to the introduction of the euro short-term rate (€STR) which is intended by the ECB working group to replace the euro overnight index average (Eonia^®) as the new euro risk-free rate. 

To implement the changes, the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland will be amended, as outlined in the attachments. As of the effective date, respectively, the full version of the amended Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland will be published on the Eurex website www.eurexchange.com under the following link:

Resources > Rules and Regulations > Contract specifications

2. Required action

Trading Participants are requested to review this circular thoroughly, as the transition to an €STR based rate from Eonia^® might have an impact on Trading Participants’ internal processes. Therefore, it might be necessary for Trading Participants to update their internal processes and technical interfaces to adapt for these changes.

3. Details of the amendments

General

The new €STR rate will first be published on 2 October 2019 by the ECB. At the same time the methodology for Eonia^® will also be changed such that Eonia^® will become €STR plus a fixed spread determined by the ECB from this date. On 31 May 2019, the ECB provided the one-off spread between €STR and Eonia^® as being calculated at 0.085 percent (8.5 basis points) i.e. Eonia^® = €STR + 0.085 percent.

The €STR rate will be available by 08:00 CET on each TARGET2 business day, based on actual individual transactions from the previous day. If errors are detected following the publication of €STR that affect €STR by more than two basis points, the ECB will revise and re-publish €STR on the same day at 09:00 CET. No changes will be made to €STR after that time. 

Changes to the contracts for EURO STOXX 50^® Total Return Futures

Index Total Return Futures Contracts on EURO STOXX 50^® (Product ID: TESX)) currently specify the Funding Rate applicable as Eonia^® (as a percentage). From 2 October 2019, the Funding Rate will be amended to €STR (as a percentage) + the ECB provided the one-off spread between €STR and Eonia^® i.e. 0.085 percent. 

The revised Funding Rate will exactly replicate the changed methodology for Eonia^® and is economically neutral. The revised Funding Rate will be applied to calculate Daily Funding and Accrued Funding from this date onwards and will be applicable to all open contracts and traded contracts in all expiries from this date. 

Trading Participants should be aware of this change in case there is a need for development or operational work to support the use of this new Funding Rate and spread benchmark and methodology in application to the contract.

As noted above, €STR will not be published until 08:00 CET and as the revised Funding Rate cannot be calculated until the publication, the trading hours will be amended to ensure that the revised Funding Rate can be entered prior to the start of trading. The change in trading hours will be introduced on 30 September 2019.

Trading Participants should be aware of this change in case there is a need for operational processes to be adapted. No change in the Liquidity Provider scheme will be made at this time.

As noted, there is also the potential that €STR can be revised and re-published up until 09:00 CET. With the revised Funding Rate of €STR and spread, it is possible that there is correction to the Funding Rate until this time. If this occurs, the corrected Funding Rate shall be used to calculate the difference applicable to any impacted trades in relation to their originally calculated Traded Futures Price and determine corresponding adjustments based on the amended rate. This will only have an impact on those Trades entered using the Eurex T7 Trade Entry Services as Trade at Market (TAM) trades prior to any correction. These adjustments shall be determined on the next trading day.

Trading Participants should be aware of this change in case there is a need for operational processes to be adapted in case such a correction occurs.

Changes to the contracts for EURO STOXX 50^® Variance Futures

Variance Futures Contracts on EURO STOXX 50^® (Product ID: EVAR) currently specify the risk-free overnight rate applicable as Eonia^®. This risk-free rate is used in calculation of the Accumulated Return on Modified Variation Margin (ARMVM). From 2 October 2019, the risk-free rate will be amended to be €STR (flat) as published that day.

Trading Participants should be aware of this change in case there is a need for development or operational work to support the use of this new Funding Rate and spread benchmark and methodology in application to the contract. 

4. Phasing out of Eonia^® – Moving to €STR (flat) 

It is envisaged that the Eonia^® publication will end on 3 January 2022. The ECB working group on euro risk-free rates recommends the gradual replacement of Eonia^® with €STR for all products and contracts, making the €STR their standard reference rate.

Based on the revised Funding Rate methodology, this means that for EURO STOXX 50^® Total Return Futures, there will be a need, at some date prior to the end of 2021, to move the Funding Rate from €STR plus spread to €STR (flat). Such a move will have an impact on the economics of all outstanding open interest and subsequent trades in these contracts when such a revision is made.

Eurex Clearing will determine the methodology for the implementation of a change of the Funding Rate to €STR flat at that time and in parallel a compensation mechanism be put in place for all open interest in all expiries at that time.

The timing for the implementation of such an amendment is not yet determined, but the proposal would be to define both the timings and compensation methodology and will be announced in due course. 
 

Attachments:

• 1 – Updated sections of the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland as of 30 September 2019 (Amendment of Trading Hours)   
• 2a/2b – Updated sections of the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland as of 2 October 2019 (Amendment of “Funding Rate” for Index Total Return Futures and “risk-free overnight rate” for Variance Futures)