In the hippocampus, episodic memories are thought to be encoded by the formation of ensembles of synaptically coupled CA3 pyramidal cells driven by sparse but powerful mossy fiber inputs from dentate gyrus granule cells. The neuromodulators acetylcholine and noradrenaline are separately proposed as saliency signals that dictate memory encoding but it is not known if they represent distinct signals with separate mechanisms. Here, we show experimentally that acetylcholine, and to a lesser extent noradrenaline, suppress feed-forward inhibition and enhance Excitatory–Inhibitory ratio in the mossy fiber pathway but CA3 recurrent network properties are only altered by acetylcholine. We explore the implications of these findings on CA3 ensemble formation using a hierarchy of models. In reconstructions of CA3 pyramidal cells, mossy fiber pathway disinhibition facilitates postsynaptic dendritic depolarization known to be required for synaptic plasticity at CA3-CA3 recurrent synapses. We further show in a spiking neural network model of CA3 how acetylcholine-specific network alterations can drive rapid overlapping ensemble formation. Thus, through these distinct sets of mechanisms, acetylcholine and noradrenaline facilitate the formation of neuronal ensembles in CA3 that encode salient episodic memories in the hippocampus but acetylcholine selectively enhances the density of memory storage.