EUR Overnight Benchmark - ESTER

The ECB has announced the result of the public consultation about the alternative EUR overnight benchmark. As expected, the ESTER rate, to be published by the same ECB, has been recommended by the Working Group on 13 September 2018 be used as the risk-free rate for the euro area.

I still don't like the name risk-free rate (RFR). As described on the ECB ESTER page, "ESTER will reflect the wholesale euro unsecured overnight borrowing costs of euro area banks". The rate is for unsecured and credit-risky transactions.

The world is now divided in two groups, one where the reference overnight benchmarks are secured overnight rates - e.g. USD and CHF - and one where the reference overnight benchmarks are unsecured overnight rates - e.g. EUR and GBP. That can only increase the cross-currency basis and give more work to quants.

On the secured rate front, we will soon have two competing term rates: OIS-like derivatives based on repo overnight rates and term repos. What is the link between them? In the unsecured world, there was a clear difference between the OIS rate based on unsecured overnight rates and term unsecured deposits (IBORs). What happen to this clear difference in the secured world, where repos are collateralised (usually by bonds) and derivatives are collateralised (usually by cash paying repo-based benchmark rates)? Note on that to follow shortly.

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