ESTER: a new money-market benchmark rate since the 2 October 2019
ESTER, an acronym for Euro Short-TEm Rate has been designated by the European Central Bank (ECB) as the successor of EONIA. This new money-market benchmark rate has been published by the ECB for the first time on 2 October 2019.
Why does the money market need a new reference rate?
After the scandal of the interbank rate manipulation by banks between 2006 and 2012, the European Union decided to change their determination methodology and to establish them on the basis of real transactions observed on the financial markets instead of exclusively on supposedly exact declarations submitted by the financial institutions. With the new Benchmark Regulation (also known as the “BMR”), which entered into force on 1 January 2018, the European Union has passed laws to reinforce the regulatory framework, guarantee greater transparency, improve the reliability of the data and methods used, increase the amount of information provided to the investor and thereby limit the risks of manipulation.
With the implementation of this new regulatory framework, the EONIA reference rate, which is determined on the basis of the interbank market rates declared by the banks, must be replaced. This replacement is especially necessary given that the constraints now imposed on banks for short-term financing have reduced the size of the market for interbank transactions, and so, with this reduction in flows, the EONIA reference rate has tended to reflect mainly the transactions of the French and German banking institutions.
Since the 2 October 2019, its successor, ESTER, has been calculated by the ECB on the basis of real transactions weighted by volume and will replace EONIA with effect from 3 January 2022. More reliable and more representative of the Eurozone money market than EONIA, ESTER is calculated from the data of 52 Eurozone banking institutions, compared with only 28 for EONIA, and also cover more significant volumes. The calculation method is based on the average of the rates applied for 50% of the transactions, after removing the upper and lower tails of the distribution (the lowest 25% and highest 25%). If necessary, to avoid any risk of manipulation or the effects of a liquidity crisis, the ECB will be able to take exceptional measures if 75% of more of the volumes are conducted by 5 banks or less, or if the number of participating institutions is reduced to fewer than 20.
What are the stakes for MMFs during the transition period?
The period from 2 October 2019 to 3 January 2022 is a transition period, during which EONIA will continue to be calculated. However, the EONIA rate is, from now on, determined on the basis of ESTER and correspond to ESTER + 8.5 bps. Additionally, since ESTER is published on D+1 at 8 a.m., EONIA will now be published on D+1 at 9.15 a.m.
At Groupama AM, we will take advantage of this transition period to switch our money market benchmarks to ESTER and update our legal documentation and IT tools. Work has already started on adapting our processes and is scheduled to be implemented gradually, probably from the 1st half of 2020.
Whatever the case, this change of benchmark will not change the quality of our money market management or the performance/risk profiles of our portfolios.
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