The European Central Bank starts publishing Estr, its new interest rate benchmar...
LONDON - The European Central Bank starts publishing Estr, its new interest rate benchmark, on Wednesday, in the biggest change for market plumbing since the introduction of the euro two decades ago.
Dubbed the world’s most important number, Libor is an interest rate based on quotes from banks on how much it would cost to borrow money from each other. It is a price reference for derivatives to home loans and credit cards worth over $300 trillion globally. U.S. and UK markets already use central bank alternatives for new derivatives contracts, bonds and loans. But switching to the new rates in outstanding contracts will be a massive exercise, costing $300 million to $400 million for big banks. Britain alone has an estimated 200,000 Libor-linked mortgages.Estr is compiled by the European Central Bank. After a pilot, the ECB will formally publish it for the first time on Oct. 2, reflecting trading on Oct. 1.
Eonia was based on quotes from banks, but from Tuesday it is redefined as the Estr rate plus a fixed spread 8.5 basis points. It will be discontinued at the end of 2021.No. Estr is for short-term contracts. The separate Euribor benchmark, created in 1999 when the euro was introduced, is for contracts that stretch from a week to 12 months.
The Bank of England took over an industry-compiled sterling overnight index average, or Sonia, revamped it and began calculating and publishing the rate in April 2018. Using the “risk free” rates for new contracts is the easy bit. Banks are making changes, but their customers need prompting in some cases.
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