Global authorities’ efforts to move capital markets on to a sounder base took a step forward after European authorities launched a new benchmark based on overnight deals.
The new rate, called €STR, is intended to replace Eonia, a daily reference rate that reflects unsecured overnight lending between banks in the EU and which prices about €24tn of derivatives deals. The European Central Bank published the €STR rate for the first time on Wednesday, at a rate of minus 0.549 per cent based on Tuesday’s trading.
Watchdogs around the world argue that well-known interbank lending rates such as Libor and Eonia have outlived their usefulness because there are so few transactions that underpin the market, and banks no longer want to contribute to it.
More than $300tn of contracts are priced against Libor, for example, but the rate is largely composed by banks’ estimates rather than market transactions. Regulators would prefer investors and borrowers to price their thousands of loans, bonds and derivatives contracts on more reliable overnight lending rates.
The overnight rates are closely watched because the “front end” of European interest rate curves are derived from them. €STR is a “risk-free” rate and is based on deals concluded the previous day. [...]
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