The Euribor, or euro interbank offered rate, is not only a key reference rate for products such as savings accounts and mortgages – it is also a benchmark for interest rate swaps that allow corporates to borrow money at more favourable rates.
The authors of a research note published by ING in July referred to the widening of the Euribor-€STR basis as an example of how tighter financing conditions are feeding through to various corners of the economy and markets.
The euro short-term rate, or €STR (the average rate at which banks borrow overnight deposits from other financial institutions, including non-banks, on an unsecured basis), is being used more widely for the euro leg of interdealer cross-currency swap trades, hinting at the possibility of €STR usurping Euribor across the whole euro swaps market.
When it comes to cross-currency swaps, the market is predominantly in risk-free rates – so a USD vs EUR cross-currency trade is set as referencing the secured overnight financing rate (Sofr) versus €STR.
Across all the major currencies – EUR, USD, GBP, JPY, CHF – only the euro reference rate continues to be based on the ‘old’ contribution methodology, albeit with improvements to ensure that it is compliant with the EU Benchmarks Regulation.
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