€STR(Euro Short-Term Rate), formerly called ESTER, is a rate that reflects the weighted average cost of unsecured overnight borrowing in the interbank market of the euro area.
In 2018, €STR was proposed as a new risk-free rate of the money market, which replaces three risk rates: EUR LIBOR, EURIBOR, EONIA. Replacement of the rate is related to the ongoing reform of benchmarks in the world.
Despite the fact that the rate was developed in 2018, its first publication took place only on October 2, 2019. Until that moment, pre-€STR was published – a rate calculated on the basis of data and methodology of the “real” €STR.
The €STR is administered by the European Central Bank. The ECB collects statistical information on money market activities in the European Monetary Union and publishes it in the MMSR. The €STR is calculated on the basis of the weighted average volume of transactions of 50 MMSR participating banks, trimmed by 25% of the top and bottom limits of the volume. A proportional calculation is applied to volumes that overlap with trimming thresholds to ensure that exactly 50% of the total allowable volume is used when calculating the weighted average volume.
The European Central Bank publishes the €STR of the previous business day on the next business day at 08:00 CET (TARGET2 calendar).
In 2019, the average daily volume of transactions on the basis of which the pre-€STR was calculated amounted to EUR 37 billion. This is more than 15 times the size of the EONIA transaction market. On average, pre-€STR is lower than EONIA by 8.5 bps.
Compared to EONIA, the €STR is more stable due to the larger number of participating banks, the larger volume of transactions and the trimmed volume principle when calculating the rate value. Besides that, among the features of the €STR, the opposite effect of the end of the month can be distinguished – the value of €STR falls at the end of the month, while the value of EONIA grows.
The London Clearing House will start clearing the €STR swaps on October 21, 2019.
A transition to discounting the fixed-period instruments at the €STR is scheduled for the second quarter of 2020.
FRNs based on the risk-free €STR were issued for the first time by the issuer Landeskreditbank Baden-Wurttemberg in September 2019. This is a 2-year issue for EUR 250 million, the interest rate depends on €STR + 2%.