The ISDA 2021 EONIA Collateral Agreement Fallbacks Protocol

ISDA has released the ISDA 2021 EONIA Collateral Agreement Fallbacks Protocol (the Protocol) to allow market participants to amend the terms of certain ISDA published collateral agreements to incorporate a fallback to €STR plus 8.5 basis points upon the cessation of EONIA. The Protocol is available here.

Background

From 3 January 2022, the administrator of the Euro Overnight Index Average (EONIA), which is the benchmark rate for Euro, is expected to cease to publish EONIA as a result of EONIA being non-compliant with the Regulation on indices used as benchmarks in financial instruments (the Benchmarks Regulation or BMR).

The market replacement for EONIA is the euro short-term rate (€STR) which is published by the European Central Bank (the ECB). In fact, since 1 October 2019, EONIA has been calculated by its administrator with a reformed methodology of €STR plus a fixed spread of 0.085% (8.5 basis points).

EONIA is commonly used as, among other things, the interest rate for Euro cash collateral in collateral agreements for the trading of derivatives (eg the ISDA-published Credit Support Annex or CSA). Therefore, market participants with references to EONIA in such agreements will need to find a solution to contractually effect the necessary amendments to transition from EONIA to €STR prior to the expected cessation date of 3 January 2022.

To address this issue, on 18 August 2021 ISDA published the Protocol which allows market participants to amend the terms of certain ISDA collateral agreements to incorporate a fallback to €STR + 0.085% upon the cessation of EONIA.

The Protocol

The Protocol incorporates specific provisions from the ISDA Collateral Agreement Interest Rate Definitions Version 2.0 (the Collateral Definitions) into all collateral agreements between the parties which are covered by the Protocol (as defined in the Protocol as "Protocol Covered Documents"). The Protocol replaces all references to EONIA in such Protocol Covered Documents with references to “EONIA (Collateral Rate)” (as defined in the Definitions). The effect of this is that, on the cessation of EONIA on 3 January 2022, references to EONIA in Protocol Covered Documents will be replaced with references to “Modified EuroSTR” which is defined under the Definitions as €STR + 0.085%.

As EONIA is already calculated by the ECB under its reformed methodology as €STR + 0.085%, adhering to the Protocol should not amount to an economic change between the parties in this respect. Instead, its purpose is to effect a formal change in such Protocol Covered Documents to replace references to EONIA with references to Modified EuroSTR from the cessation date.

The Protocol will be effective (ie the amendments made by the Protocol to the agreement(s) will take effect) from the later of the dates on which two adhering parties to the Protocol have had their Adherence Letters accepted and approved by ISDA. However, references to EONIA will only be replaced with Modified EuroSTR from the cessation date.

Should I adhere to the Protocol?

The Protocol is structured as the now-traditional “multilateral” contractual amendment (ie it amends all Protocol Covered Documents which have been entered into between two market participants that have adhered to the Protocol) and therefore offers an efficient way for market participants to make the necessary amendments to collateral agreements to address the transition from EONIA to €STR.

The alternative to adhering to the Protocol is for firms to negotiate bilateral amendment agreements with each of their market counterparties in respect of each relevant collateral agreements that they have entered into with such counterparties. Prior to the publication of the Protocol, some market participants had negotiated bilateral amendment agreements. If a firm has executed any such bilateral amendment agreements in respect of their affected collateral agreements, then such collateral agreements will fall outside of the Protocol.

Firms should note, however, that the Protocol is narrower in scope than many of the negotiated bilateral amendment agreements – eg (1) it does not address the amendments that may be required in respect of other trading agreements between market counterparties (eg the master agreements for trading repurchase agreements, the “GMRA” or “Global Master Repurchase Agreement”) and (2) it does not provide the amendments for the transition of interest rates for other currencies such as the transition of United States Dollar interest rates to the “secured overnight financing rate” or “SOFR” (which ISDA may address with a subsequent protocol).

Process for adherence

To adhere to the Protocol (available here), firms should submit an Adherence Letter to ISDA and pay a one-time fee of US$500 to ISDA at or before submission of the Adherence Letter.

An investment adviser / manager can adhere to the Protocol as agent on behalf of one or more underlying clients provided that it entered into the relevant agreements (eg the CSA) as agent on behalf of such underlying client(s) (ie the CSA was signed by the investment adviser / manager as agent on behalf of the underlying client(s)).