Key Takeaways
- EONIA tracked average overnight euro interbank lending rates.
- Replaced by €STR for better transparency and reliability.
- EONIA rate = €STR plus 8.5 basis points after 2019.
- Discontinued permanently on January 3, 2022.
What is Euro Overnight Index Average (Eonia)?
The Euro Overnight Index Average (Eonia) was a benchmark interest rate reflecting the average rate at which European banks lent unsecured funds overnight to each other in the eurozone. It was calculated daily by the European Central Bank using data from a panel of major banks and served as a key reference in financial markets.
Eonia played a crucial role similar to other benchmark rates like AAA-rated securities and was widely used in interest rate swaps and derivatives pricing before its replacement by the €STR.
Key Characteristics
Eonia had distinctive features that made it central to eurozone financial transactions:
- Unsecured Overnight Rate: Measured the weighted average of overnight unsecured interbank lending within the EU and EFTA countries.
- Calculation Method: Initially based on actual transaction data from 28 banks, later adjusted as the €STR plus 8.5 basis points starting October 2019.
- Regulatory Oversight: Published by the European Central Bank, ensuring transparency and consistency.
- Benchmark Usage: Underpinned nearly $200 trillion in contracts, including residential mortgages and interest rate derivatives.
- Transition: Permanently discontinued in January 2022, replaced by the more robust €STR benchmark.
How It Works
Eonia functioned as a weighted average rate of unsecured overnight lending transactions reported by a panel of major European banks. Each day, the European Central Bank collected transaction data to calculate the rate, reflecting the cost of overnight liquidity in the interbank market.
From October 2019, Eonia’s calculation shifted to a synthetic method by adding 8.5 basis points to the €STR, a rate derived from actual wholesale lending transactions. This change improved reliability and aligned Eonia with evolving regulatory standards to enhance benchmark accuracy and reduce susceptibility to manipulation.
Examples and Use Cases
Eonia was integral to various financial products and institutions managing eurozone interest rate exposure:
- Airlines: Companies like Delta considered benchmark rates such as Eonia when managing currency and interest rate risk in their financing strategies.
- Derivatives Pricing: Financial institutions used Eonia as a reference rate for pricing and settling overnight index swaps and other interest rate derivatives.
- Mortgage Lending: Banks priced variable-rate mortgages and loans based on Eonia before transitioning to alternative benchmarks.
- Investment Portfolios: Investors monitoring interest rate movements considered Eonia alongside tools like large-cap stocks to assess market conditions.
Important Considerations
The discontinuation of Eonia requires users to adapt to the €STR benchmark, which offers enhanced transparency and robustness. When analyzing historical data or contracts referencing Eonia, you should be aware of the methodological change in late 2019 that affected comparability.
Practitioners should also understand how shifts in overnight rates impact valuations, including discounted cash flow (DCF) models and fair value assessments, to maintain accurate financial analysis amid evolving benchmarks.
Final Words
EONIA's discontinuation marks a key shift in eurozone financial benchmarks, now fully replaced by the more robust €STR. Review your contracts and financial models to ensure they reference €STR for accurate and compliant interest rate calculations.
Frequently Asked Questions
EONIA was a benchmark interest rate representing the weighted average of unsecured overnight interbank lending transactions among European banks. It played a key role in the eurozone financial markets, underpinning about $200 trillion in transactions.
Originally, EONIA was calculated daily by the European Central Bank as a weighted average of actual overnight lending transactions between banks in the EU and EFTA countries, based on data from 28 major banks.
Starting in October 2019, EONIA was no longer calculated directly from overnight lending transactions but was determined by adding 8.5 basis points to the euro short-term rate (€STR), a more reliable benchmark.
EONIA was discontinued due to concerns about its reliability and transparency, especially after manipulation scandals like LIBOR. The €STR provides a more robust and transparent benchmark for overnight euro lending rates.
The official transition occurred on January 3, 2022, when EONIA was permanently discontinued and fully replaced by the €STR as the standard overnight rate benchmark in the eurozone.
EONIA was used as a reference rate for euro interest rate swaps, residential mortgages, interest rate derivatives, and to determine interest on posted variation margins in financial transactions.
The European Central Bank calculated the rate daily based on data from a panel of 28 major banks, while the European Money Markets Institute (EMMI) communicated updates and managed the transition to €STR.
