Interbank overnight interest rates: October sees the €STR replace the EONIA
A change will be made to interbank overnight interest rates on 2 October 2019: the current EONIA will be replaced by the Euro Short-Term Rate or €STR. The ECB will publish the €STR every trading day by 9 am CET. The EONIA will remain in use until the end of 2021, but in the interim (i.e. from 2 October 2019) it will be calculated as the €STR plus a fixed spread of 8.5 basis points. The Bank of Slovenia finds that the proportion of contracts in Slovenia tied to the EONIA is very low in value terms. The majority of financial instruments are tied to the EURIBOR, where the reforms are not yet finalised.
The benchmark interest rates most commonly used for euro-denominated financial contracts are the EONIA and the EURIBOR, which are provided by the European Money Markets Institute (EMMI). The majority of financial instruments are tied to the EURIBOR, which is used in bank loan agreements, and is also widely used in derivatives contracts.
Figure 1: Proportion of contracts tied to EURIBOR and EONIA (stock, end of May 2018), value terms, %
Sources: European Securities and Markets Authority, Bank of Slovenia
Reforms to benchmark interest rates
Recent years have seen reforms to the benchmark interest rates, as the existing benchmarks were no longer reflecting their true values, and there were deficiencies in their provision. Two years ago the Governing Council of the ECB therefore resolved to develop a euro risk-free overnight interest rate, which is known as Euro Short-Term Rate (€STR) and enters into force on 2 October 2019.
The €STR will reflect the cost of borrowing cash from banks on the wholesale money market. It will replace the EONIA (Euro OverNight Index Average), which will remain in use until the end of 2021. In the interim (i.e. from 2 October 2019 until the end of 2021) the EONIA will be calculated as the €STR plus a fixed spread of 8.5 basis points.
The ECB is already publishing a test interest rate, the pre-€STR, which is calculated using the same methods as the €STR, and is also a key element in the calculation of the fixed spread (8.5 basis points was the spread between the EONIA and the pre-€STR between 17 April 2018 and 16 April 2019).
EURIBOR remains in force
In contrast to the EONIA, the Eurosystem does not have a direct role in the reforms to euro benchmark interest rates of longer maturities. The activities to reform the EURIBOR, which is remaining in force, are being led by the EMMI. It is planning to use a hybrid methodology to calculate the new EURIBOR, which will allow the interest rate to be calculated on the basis of transactions, at least in part. The selection of transactions has been expanded to include wholesale funding from other financial institutions that credit institutions obtain on the unsecured money market. The hybrid methodology for calculating EURIBOR interest rates will enter into full force by the end of 2019.