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ESTR (Euro short-term rate, €STR)

Category — Rates
By Aizada Asanbekova, Project Manager of Western Europe Fixed Income Department 
Updated January 15, 2025

What is ESTR

The Euro Short-Term Rate (€STR) is an overnight benchmark rate for the euro currency. This interest rate, calculated by the European Central Bank (ECB), is used in financial contracts involving the euro. €STR is based on the money market statistical reporting of the Eurosystem, reflecting market rates. It replaced the Euro Overnight Index Average (EONIA) as the Euro risk-free rate, following the recommendations of the working group on euro risk-free rates. This rate is important for ensuring financial stability and accurate representation of overnight borrowing costs in the euro area.

/></p> <h2>ESTR Explained</h2> <p>The European Central Bank (ECB) calculates the Euro Short-Term Rate (€STR) based on transaction-level data from a panel of banks. This data includes unsecured overnight borrowing transactions conducted through wholesale money markets. The €STR is computed as a volume-weighted average of all qualifying transactions, accurately reflecting the actual borrowing costs of banks.</p> <p>The €STR control framework adheres to international best practices, as set out in the Principles for Financial Benchmarks of the International Organisation of Securities Commissions (IOSCO). The €STR statement of compliance provides an overview of how the ECB administers the rate, including a self-assessment of how the governance, quality, and accountability processes comply with each IOSCO principle. This statement is confirmed by an external audit company in an independent assurance report, ensuring the €STR is calculated and published in an unbiased way, reflecting market rates and overnight borrowing costs in the euro area.</p> <h2>Methodology</h2> <p>The Euro Short-Term Rate (€STR) is a benchmark based on unsecured overnight borrowing transactions exceeding €1 million.</p> <h3>Calculation Methodology</h3> <ol> <li> <p><strong>Data Collection</strong>. Transactions conducted from banks across the euro area, focusing on unsecured overnight borrowing costs.</p> </li> <li> <p><strong>Ordering Transactions</strong>. Transactions are ranked from the lowest to the highest rate.</p> </li> <li> <p><strong>Aggregating Transactions</strong>. Transactions are aggregated at each rate level.</p> </li> <li> <p><strong>Trimming</strong>. The top and bottom 25% in volume terms are removed (trimming).</p> </li> <li> <p><strong>Calculating the Mean</strong>. The mean of the remaining 50% is calculated and rounded to the third decimal.</p> </li> </ol> <p>The €STR is published on every TARGET2 business day at 8:00 CET (Central European Time), reflecting the trading activity of the previous business day. If errors are detected, the €STR is revised and republished on the same day at 9:00 CET.</p> <h3>Forward-looking Term Structure</h3> <p>An OIS (Overnight Indexed Swap) quotes-based methodology is recommended for the €STR-based forward-looking term structure as a fallback for Euribor-linked contracts. The working group will analyze further approaches.</p> <p>This methodology ensures that the €STR reflects actual market rates and is a reliable reference rate for financial contracts. The European Central Bank (ECB) ensures that the €STR is calculated and published in line with international best practices, contributing to financial stability in the euro area.</p> <h2>Characteristics</h2> <ol> <li> <p><strong>Publication</strong>. The €STR is published by the European Central Bank (ECB).</p> </li> <li> <p><strong>Market Segment</strong>. It is based on the unsecured market segment. The ECB developed an unsecured rate to replace EONIA, as a secured rate would be affected by the type of collateral used.</p> </li> <li> <p><strong>Data Coverage</strong>. The money market statistical reporting covers the 50 largest banks in the euro area in terms of balance sheet size.</p> </li> <li> <p><strong>Scope</strong>. While EONIA reflected the interbank market, €STR extends the scope to include money market funds, insurance companies, and other financial corporations. This inclusion is due to banks developing significant money market activity with these entities.</p> </li> </ol> <h2>The Transition from EONIA to ESTR</h2> <p>The Euro Short-Term Rate (€STR) was introduced as a replacement for the Euro Overnight Index Average (EONIA) due to the European Benchmark Regulation, which aimed to enhance the robustness and reliability of benchmark rates. €STR offers several advantages over EONIA, including a broader scope, increased data accuracy, and adherence to international best practices.</p> <p>Adhering to international best practices as outlined by the International Organisation of Securities Commissions (IOSCO), €STR ensures credibility and robustness. It is calculated as a volume-weighted trimmed mean of unsecured overnight borrowing transactions conducted through wholesale money markets. This methodology provides an unbiased way to reflect market rates.</p> <p>The transition to €STR was essential for aligning with international best practices and enhancing the accuracy and reliability of overnight borrowing costs in the euro area, ensuring that financial contracts and monetary policy decisions are based on a more robust and comprehensive benchmark rate.</p> <h2>Implications of ESTR for Borrowers and Lenders</h2> <p>For borrowers, the Euro Short-Term Rate (€STR) directly impacts the interest rates they pay on loans. When €STR rises, borrowing costs increase, making credit more expensive. Conversely, a decrease in €STR can lead to lower interest rates, making borrowing more affordable. For lenders, €STR is used to price their loan offerings, ensuring a fair rate of return while managing risks associated with lending. This dynamic ensures that both borrowers and lenders are aligned with the current market rates, maintaining financial stability and fairness in the euro area's financial markets.</p> <h2>ESTR vs. Other Benchmark Rates</h2> <p>While the Euro Short-Term Rate (€STR) is specific to the euro area, other benchmark rates exist globally, such as the <a href=London Interbank Offered Rate (LIBOR) and the Secured Overnight Financing Rate (SOFR). Each benchmark rate serves its respective market and significantly influences borrowing costs and financial market dynamics.

€STR reflects the overnight borrowing costs in the euro area, based on unsecured overnight borrowing transactions conducted by banks. It ensures financial stability and accurate representation of market rates, following international best practices.

LIBOR, used primarily in the UK and international markets, is a reference rate for various financial contracts and loans, but is currently being phased out in favor of more robust alternatives like SOFR or €STR.

SOFR, specific to the US market, reflects the cost of borrowing cash overnight collateralized by Treasury securities. It offers a secured rate, contrasting with the unsecured nature of €STR. Both SOFR and €STR are calculated and published by their respective central banks, ensuring transparency and adherence to international best practices.

Example

The European Central Bank (ECB) publishes the Euro Short-Term Rate (€STR), reflecting the trading activity from the previous business day. For instance, the rate published on 2 October 2019 represented trading activity from 1 October.

The €STR is available on the ECB’s website, through the ECB’s Market Information Dissemination (MID) platform, and in the ECB Data Portal. The MID platform serves as the primary publication channel for the €STR. This ensures that the €STR reflects the previous business day's trading activity and provides a reliable reference rate for financial contracts and monetary policy decisions in the euro area.

FAQ

  • What is the difference between ESTR and EURIBOR?

    The Euro Short-Term Rate (€STR) reflects overnight borrowing costs in the euro area based on unsecured overnight transactions conducted by banks. In contrast, EURIBOR (Euro Interbank Offered Rate) represents the average interest rate at which banks in the eurozone are willing to lend to one another for different maturities, typically ranging from one week to one year. While €STR focuses on overnight transactions, EURIBOR covers multiple maturities, providing a broader perspective on interbank lending rates.

  • How is the ESTR rate calculated?

    The €STR rate is calculated using transaction-level data from the 50 largest banks in the euro area, focusing on unsecured overnight borrowing transactions. The rate is computed as a volume-weighted trimmed mean of all qualifying transactions. The calculation involves ordering transactions by rate, aggregating them, trimming the top and bottom 25% in volume terms, and then calculating the mean of the remaining 50%, rounded to the third decimal. This method ensures an accurate and unbiased representation of market rates.

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