On 2 October 2019, the European Central Bank (ECB) published the first Euro short-term rate. Calculated on the basis of the transactions carried out on 1st October, the index was -0.549% (ISIN code: EUOOOA2X2A25).
The adoption of this new reference rate has been intended by financial regulators who consider it necessary to reform the calculation of indices used as a benchmark for the euro area interbank market. EONIA is the first index to be reformed. Reflections are under way to reform other reference rates, especially EURIBOR.
A look back at the replacement of EONIA
On 13 September 2018, the ECB announced that ESTER had been selected by the Public-Private Working Group on Reference Interest Rates to succeed EONIA. It will enter into force on 3 January 2022.
The ESTER rate is based on actual volume-weighted transactions, which makes it difficult to manipulate. This new rate is managed by the ECB and is based on the daily submission of data from bank reports under the MMSR (Money Market Statistical Reporting) regulation.
ESTER calculation method
The ESTER is calculated based on unsecured interbank loans contracted on a day-to-day basis between institutions. The process is as follows:
- Every day, the ECB collects information on the loans of 52 institutions in the EURO area. Only transactions above €1M are recorded.
- These transactions are then classified by increasing interest rate. Transactions with the same interest rate are aggregated.
- The 25% of transactions with the lowest interest rates and the 25% with the highest interest rates are removed from the calculation pool.
- The ECB then only keeps the remaining 50% to calculate a volume-weighted average. From this calculation, the ECB establishes the ESTER.
A progressive implementation
The ESTER and EONIA rates will coexist during the period 1 October 2019 – 3 January 2022 before definitively adopting the ESTER.
During this cohabitation and in order to allow markets and operators to adapt, the ECB decided to correlate EONIA with ESTER and thus propose a “new EONIA”. Indeed, as of 1 October this year, the new EONIA is based on the ESTER and is calculated as: EONIA = ESTER+ spread; the current spread being 8.5 basis points.
Another impact of the adoption of ESTER is the change in the publication schedule. As the ESTER is published on D+1, the new EONIA will only be known on D+1.