ESTER the ECBs new short term reference rate


On 28 June 2018, the European Central Bank (ECB) published its final methodology for calculating its proposed unsecured overnight interest rate – ESTER. The methodology is the result of two public consultations on the rate that took place in February and May of this year.

The rate is intended to reflect the euro unsecured overnight borrowing costs of euro area banks and will serve as a valuable reference to the already existing private sector rates. ESTER will be based on transactions that have taken place previously, and are done at an arm's length. The transactions that form part of the calculation of the rate will be of a value of more than EUR 1 million. From the information that is collected, trimming will occur, and transactions will include the following characteristics:

  • they will be ordered from the lowest rate to the highest rate;
  • those occurring at each rate level will be aggregated;
  • the top and bottom 25% in volume terms will be removed; and
  • the mean of the remaining 50% of the volume-weighted distribution of rates will be calculated.

The ECB’s Governing Council will publish the rate from the beginning of October 2019 while also acting as the administrator that takes general responsibility for its publication. ESTER will be available through the ECB website, the Market Information Dissemination (MID) platform and the ECB’s Statistical Data Warehouse. ESTER will be published with three decimal places on each TARGET2 business day no later than 09:00 CET. In addition to the rate, the following information will also be available:

  • total nominal value of transactions before trimming in EUR millions;
  • ·number of banks reporting transactions before trimming;
  • ·number of transactions before trimming;
  • percentage of the nominal amount reported by the five largest contributing banks that day, as a whole number;
  • ·normal or contingency calculation method; and
  • rates at the 25th and 75th percentiles with two decimal places.

Prior to the publication of ESTER, the ECB will publish pre-ESTER figures, which can be used to evaluate the sustainability and applicability of the new rate. The pre-ESTER rate will be based on the same methodology used to calculate ESTER.

According to the ECB, ESTER will be regularly reviewed to ensure that it is meeting its set goals.

We will provide updates once the ECB releases further information on ESTER. In the meantime, for details on how ESTER could affect your company and business, please do not hesitate to contact us.