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ESTER is recommended by industry as the new risk free rate in the euro area

ESTER is recommended by industry as the new risk free rate in the euro area

What happened?

On Thursday 13th of September 2018, the private sector working group of European Central Bank recommended the Euro Short-TErm Rate (ESTER) as the alternative euro risk free rate and replacement for EONIA.

Read more here.

What is the ECB's Private Sector Working Group?

The working group is chaired by a private sector representative and the ECB provides the secretariat. The working group is made up of 21 credit institutions as voting members, five institutions as non-voting members and one institution as an invitee.

The group was set up by the ECB, together with the Financial Services and Markets Authority (FSMA), the European Securities and Markets Authority (ESMA) and the European Commission. These four public institutions have observer status in the group.

Find the composition of the working group here.

What is the ECB's ESTER?

ESTER reflects the wholesale EUR unsecured overnight borrowing costs of Euro area banks. It is based on borrowing transactions in EUR conducted with financial counterparties and is calculated using overnight unsecured fixed rate deposit transactions over EUR1m.


How will ESTER be calculated?

The methodology for calculating ESTER was determined taking into account feedback received in two public consultations and in line with the international standards set by the International Organization of Securities Commissions (IOSCO) on financial benchmarks. The methodology will be reviewed periodically.

ESTER will be calculated based entirely on actual individual transactions in euro that are reported by banks in accordance with the ECB’s money market statistical reporting (MMSR).

Find more details on ESTER's calculation methodology here.

How is ESTER different to EONIA?

Same with EONIA, ESTER is a daily unsecured overnight interest rate for the Eurozone. On the contrary, the new rate will not be based just on the overnight interbank borrowing costs, but also on banks’ transactions with their financial counterparties.

Additionally, the number of data submitting parties will increase from 28 to 52.

Why is the benchmark shifting from EONIA to ESTER?

Since the onset of the financial crisis, unsecured wholesale funding figures have heavily dropped as banks switched to safer ways of financing, such as borrowing against collateral or tapping ECB for cheap cash. The rigging scandals, concerning EURIBOR and LIBOR have made banks less willing in providing data.

As a result, EONIA volumes have reached historical lows in 2017, dropping even below EUR1bn in May 2017. At their peak in 2008, the figure was close to EUR80bn. At the same time, the number of banks, providing data has fallen to 28, with the top five accounting for 80% of the total volume.

Additionally, EONIA will no longer meet the criteria of the EU Benchmarks Regulation and will see its use restricted as of 1st of January 2020.

When will ESTER be published?

The ECB will begin publishing ESTER at the latest as of October 2019.

Until ESTER is available, the ECB will publish figures referred to as pre-ESTER, which market participants can use to assess the suitability of the new rate.

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