STR v EURIBOR: the battle of the euro benchmark

what is estr

To judge by the results of the pre-live verification exercise of the European Money Markets Institute (EMMI) and also by the data provided under the ECB MMSR Regulation, it appears that there are currently not enough transactions to construct purely transaction-based longer-tenor reference rates. This means that some expert judgement may be required in order to sustain daily benchmark publications on such tenors. First, the central bank may not have the same overview of the prevailing market conditions and the funding costs of banks as credit institutions have. Second, expert judgement, if provided by a central bank, might be interpreted as being related to the (desired) monetary policy stance; this might create, or be perceived as creating, a conflict of interest. The €STR is intended to be a borrowing rate, which means that it is more representative if it captures trades with all significant counterparties in the wholesale market, including international counterparties. Furthermore, excluding transactions with non-euro area counterparties would not be sufficient to ensure that the only eligible transactions are those conducted with counterparties that have access to the Eurosystem facilities.

The working group on euro risk-free rates was established to identify and recommend alternatives to existing benchmarks and led to the creation of the €STR. The ESTER rate (also called ESTR or €STR) is the 1-day interbank interest rate for the Euro zone. In other words, it is the average rate at which a group of financial institions provide loans to each other with a duration of 1 day.

what is estr

The reporting banks will continue to have obligations pursuant to the MMSR Regulation and the overall ECB statistical framework. Amendments to the MMSR Regulation will follow the established rules and procedures, and where required will be announced publicly well in advance and will involve consultation with the European Commission. The ECB decided to publish an overnight benchmark because the absence of a reliable private benchmark could result in a potential adverse impact on the transmission mechanism of monetary policy and may have repercussions for financial stability.

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As shown in the second ECB public consultation, there are sufficient data on deposit transactions to produce a reliable daily reference interest rate. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. The contingency procedure is triggered if the number of reporting banks is less than 20, or if five banks account for 75% or more of the total volume of transactions.

  1. For example, the selected alternative rate in the US is the secured overnight financing rate (SOFR), and the new rate in the UK is the reformed sterling overnight index average (SONIA).
  2. The money market statistical reporting (MMSR) sample currently covers the 47 largest banks in the euro area in terms of balance sheet size at the time of selection.
  3. The ESTER rate (also called ESTR or €STR) is the 1-day interbank interest rate for the Euro zone.

Nevertheless, and as mentioned in the first public consultation on developing a euro unsecured overnight interest rate, other counterparty sectors such as governments or non-financial corporations will not be taken into account in the €STR in order to reduce the influence of possible idiosyncratic factors on the final rate. The Euro Short-Term Rate (ESTR) is an interest rate benchmark that reflects the overnight borrowing costs of banks within the eurozone. Tomorrow heralds an important milestone in the evolving saga of LIBOR’s discontinuation, seeing the launch of the fifth and final rate, €STR, as the proposed successor to euro LIBOR.

Euro Short-Term Rate (ESTR) definition

For example, the price of a repo can vary considerably depending on the availability and use of collateral and the credit rating of the issuers of the collateral. Furthermore, the share of general collateral versus special collateral and the degree of “specialness” vary significantly over time, which reflects the respective countries’ issuance cycle in the absence of a homogeneous European collateral market and the influence of certain reporting dates, such as year-end reporting. As a result, it would be very challenging to develop a rate that is expected to have broad euro area coverage and meaningful, consistent prices in the underlying transactions at the same time. This is higher than, but not fundamentally different from, the volumes captured in the unsecured market by the €STR, although pricing remains subject to significant fluctuations on reporting dates. In October 2018, EMMI noted that, without reform, it could not be guaranteed that EURIBOR would be compliant with the BMR. In February 2019, it published a blueprint, whereby it proposed to transition its panel banks (19 at that time) across from its current quote-based methodology to a new hybrid methodology, anchored in transactions, to the extent possible.

what is estr

Pursuant to Article 11 of the €STR Guideline, any person may submit to the ECB a written complaint about any aspect of the €STR determination process that they reasonably consider has significantly affected their interests. The €STR Oversight Committee reviews, challenges and reports on all aspects of the €STR determination process as established by the €STR Guideline. All these instruments establish ethical principles, rules and procedures for the identification, reporting, disclosure, management, mitigation and avoidance of conflicts of interest in relation to all Eurosystem tasks, including all tasks related to the €STR. Further details on how the framework is implemented at the ECB are provided on the Ethics – working with integrity webpage. Summary information on errors larger than 0.1 basis points that are detected after the standard publication and do not meet the republication criteria can be found on the €STR Transparency on errors page. The €STR control framework – where relevant and appropriate – implements the international best practices set out in the Principles for Financial Benchmarks of the International Organisation of Securities Commissions (IOSCO).

How is the €STR calculated?

The hybrid methodology uses a hierarchical approach consisting of three levels, applied progressively. Under level 1, panel bank contributions are based solely on eligible transactions for that particular tenor. Level 2 looks at contributions based on transactions across the maturity spectrum using a formulaic calculation technique provided by EMMI.


The contingency computation methodology that is applied in this case is set out in the €STR methodology and policies. In February of this year, the Euro Working Group stated (based on a summary of responses from an earlier consultation) that a large majority of market participants viewed forward-looking term rates to be essential or desirable. In March, it therefore recommended a methodology for a forward-looking term rate based on the €STR derivatives market, shortly followed by a call for potential benchmark administrators to express an interest in producing such forward-looking rates.

However, although in our other articles (available here and here) we have encouraged market participants to keep abreast of market developments and make the transition over to the relevant risk-free rate when appropriate, this article tells a slightly different story. Here we note that while LIBOR’s demise is scheduled for the end of 2021, taking with it its euro rate, the market already had (and is likely to continue to have) a viable alternative to euro LIBOR in the form of EURIBOR. To date, there has been no suggestion that EURIBOR will be discontinued, instead efforts have been made to fortify the rate.

Indeed, the definition of call accounts is quite vague owing to the various non-harmonised legal frameworks in the euro area for this financial product. The definition includes savings accounts, which are also defined in a relatively broad manner in the MMSR Reporting Instructions. The euro short-term rate, and any re-publication thereof (the “rate”) and all other related data and information, including the compounded euro short-term rate average rates and the compounded euro short-term rate index, (the “information”) are published by the European Central Bank (ECB) for public information purposes only. The euro short-term rate (€STR) is published on each TARGET2 business day based on transactions conducted and settled on the previous TARGET2 business day. Unlike ESTR and other newer benchmarks, LIBOR is not transaction based, but is taken from a survey. It asks banks at what rate they would borrow money at a specific time – the 25% highest and lowest rates are dismissed, and the ‘middle’ rates are used to calculate the average.

With regard to data sufficiency, including call accounts would have increased the volume underlying the computation of the rate by around €10 billion on average, which may have supported their inclusion. However, call accounts would have improved neither the country representativeness of the rate nor the concentration, given that call accounts are used in very few jurisdictions, Germany being one example. The compounded €STR average rates and index are published via the ECB’s Market Information Dissemination (MID) platform as well as through the ECB Data Portal.

The ECB policy and procedure for the cessation of the euro short-term rate (€STR) provides the policies and procedures that would be followed in the event of a cessation of the €STR owing to any situation or circumstance which would make it no longer representative of the underlying interest. The ECB reminds the users of the €STR that they are responsible for establishing their own fall-back provisions in the event of material changes to, or a cessation of, the €STR. A public consultation, to the extent it is possible or practicable, would then be announced on the €STR website. Proposed changes and consultation responses are scrutinised by the Oversight Committee, and a summary of the comments received and the ECB’s responses is published on the €STR website along with the final result.

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