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In practice, when bilateral counterparties switch from OIS to ESTR discounting, the party which sees a fall in the fair value of the CSA contract gets compensated for the decrease by the other party (correct me if I'm wrong). As CSA discounting (ESTR) is used and ESTR is payed for collateral received (PAI), we are also seeing a fall in interest paid as it previously was payed based on EONIA.

Now hypothetically, if counterparty A had a swap with counterparty B, deeply out-of-the money for A, party A would have posted collateral and received EONIA as interest for the paid collateral. After switching to ESTR , the swap would go even deeper out-of-the money as discount rate decreases, where party B pays to A for the loss in fair value. But in addition to loss in fair value, A starts to receive lower interest for the collateral paid (ESTR vs. EONIA). Shouldn't party A also be compensated for the lost interest income (considering rates were actually positive)?

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    $\begingroup$ The change in present value is the same thing as the expected cumulative change in interest income over the life of the contract. $\endgroup$
    – dm63
    Commented Feb 8, 2021 at 0:22
  • $\begingroup$ @dm63 is correct. The 'PV=present value' of money accounts for the interest payable over the term, otherwise all discount factors would be 1. $\endgroup$
    – Attack68 ♦
    Commented Feb 10, 2021 at 12:42

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