ECB begins transition of benchmark ‘interest rate’

Bloomberg

The European Central Bank (ECB) began its official transition to a new benchmark short-term interest rate on Wednesday, as global regulators move away from tainted Libor gauges.
The new rate, known as ESTR, which reflects overnight borrowing costs of banks in the monetary bloc, fixed at -0.549 percent for October 1, the central bank said on its website.
The shift comes as similar actions are underfoot in sterling and dollar markets after a rigging scandal with the London interbank offered rate undermined confidence in indexes used as benchmarks for roughly $370 trillion of financial products worldwide. In the euro area, regulators are trying to push market participants away from the traditional Euribor and Eonia measures.
By some measures, the euro area has lagged behind other regions in the shift from the much-maligned older benchmarks. US companies have been selling debt linked to the new American reference rate for nearly a year and in the UK, financial markets have begun to decisively migrate to a sterling overnight rate index.
The good news is that the move to ESTR may be helped by the ECB’s strategy for switching from the former benchmark rate. “The transition to ESTR should be pretty straight forward given Eonia will now be computed as a tracker off this new rate,” said Adam Kurpiel, a strategist at SocieteGenerale SA. “Euro money-market derivatives will also benefit from all the Eonia infrastructure.
It should be much smoother than in the US where new markets had to be created from scratch” for their new benchmark — the secured overnight financing rate.
The inauguration of the new rate follows ECB’s years of preparation including the release of pre-ESTR data starting March 2017 through mid-September of this year.
ESTR is already starting to gain traction with Germany’s L-Bank this month pricing the first sale of syndicated notes tied to the ECB’s new benchmark. Daily trading volumes in pre-ESTR have averaged about $40 billion, with the rate staying mostly at about five basis points below the ECB’s depo rate, according to UniCreditSpA.
The European Investment Bank may price a three-year floating-rate note linked to ESTR, according to a person familiar with the matter, who asked not to be identified because they are not authorised to speak about it.
The ESTR results suggest the ECB’s deposit-rate cut last month — by 10 basis points to minus 0.50 percent — is being passed on in full through the banking system. The ESTR reading released on Wednesday was in line with an estimate for -0.55 percent from ChristophRieger, head of rates strategy at Commerzbank AG.
ESTR is a bank borrowing rate that relies on individual daily transactions. That compares with Eonia, a lending rate administered by EMMI that relies on voluntary contributions by banks. ESTR is a volume-weighted trimmed mean of overnight transactions.