Paper: arXiv 2503.06806

Authors: Marco Bianchetti, Marco Scaringi

Abstract

An important step in the Financial Benchmarks Reform was taken on 13th September 2018, when the ECB Working Group on Euro Risk-Free Rates recommended the Euro Short-Term Rate ESTR as the new benchmark rate for the euro area, to replace the Euro OverNight Index Average (EONIA) which will be discontinued at the end of 2021. This transition has a number of important consequences on financial instruments, OTC derivatives in particular. In this paper we show in detail how the switch from EONIA to ESTR affects the pricing of OIS, IRS and XVAs. We conclude that the adoption of the “clean discounting” approach recommended by the the ECB, based on ESTR only, is theoretically sound and leads to very limited impacts on financial valuations. This finding ensures the possibility, for the financial industry, to switch all EUR OTC derivatives, either cleared with Central Counterparties, or subject to bilateral collateral agreements, or non-collateralised, in a safe and consistent manner. The transition to such EONIA-free pricing framework is essential for the complete elimination of EONIA before its discontinuation scheduled on 31st December 2021.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 4.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a rigorous mathematical formulation of derivative pricing under the benchmark transition from EONIA to €STR across OIS, IRS, and XVAs. While it offers clear theoretical derivations and practical industry insights into clean discounting, it relies primarily on stylised numerical examples rather than extensive empirical backtesting.

Research Flowchart

  flowchart TD
    A["Research Goal: Assess Financial Impact of Transitioning from EONIA to €STR"] --> B["Inputs: OIS, IRS, and XVAs Derivative Frameworks"]
    B --> C["Methodology: Theoretical Analysis of Benchmark Rate Switch"]
    C --> D["Computational Process: Evaluate 'Clean Discounting' on Valuations"]
    D --> E["Findings: 'Clean Discounting' is Mathematically Sound with Minimal Valuation Impact"]
    E --> F["Outcome: Safe & Consistent Transition for Collateralized and Uncollateralized EUR OTC Derivatives"]