The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in
London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is usually abbreviated to Libor () or LIBOR, or more officially to ICE LIBOR (for
Intercontinental Exchange LIBOR). It was formerly known as BBA Libor (for
British Bankers' Association Libor or the trademark bba libor) before the responsibility for the administration was transferred to
Intercontinental Exchange. It is the primary benchmark, along with the
Euribor, for short-term interest rates around the world. Libor was phased out at the end of 2021, and market participants are being encouraged to transition to
risk-free interest rates.
As of late 2022, parts of it have been discontinued, and the rest is scheduled to end within 2023; the Secured Overnight Financing Rate (
SOFR) is its replacement.
Libor rates are calculated for five currencies and seven borrowing periods ranging from overnight to one year and are published each business day by
Thomson Reuters.
Many financial institutions, mortgage lenders, and credit card agencies set their own rates relative to it. At least $350
trillion in
derivatives
The derivative of a function is the rate of change of the function's output relative to its input value.
Derivative may also refer to:
In mathematics and economics
* Brzozowski derivative in the theory of formal languages
* Formal derivative, an ...
and other financial products are tied to Libor.
In June 2012, multiple criminal settlements by
Barclays Bank revealed significant fraud and collusion by
member banks connected to the rate submissions, leading to the
Libor scandal.
The British Bankers' Association said on 25 September 2012 that it would transfer oversight of Libor to UK regulators, as proposed by
Financial Services Authority
The Financial Services Authority (FSA) was a quasi-judicial body accountable for the financial regulation, regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investmen ...
managing director
Martin Wheatley's independent review recommendations.
Wheatley's review recommended that banks submitting rates to Libor must base them on actual inter-bank deposit market transactions and keep records of those transactions, that individual banks' Libor submissions be published after three months, and recommended criminal sanctions specifically for manipulation of benchmark interest rates.
Financial institution customers may experience higher and more volatile borrowing and hedging costs after implementation of the recommended reforms.
The UK government agreed to accept all of the Wheatley Review's recommendations and press for legislation implementing them.
[Ainsley Thomson (17 October 2012]
"UK Treasury Minister: Government Accepts Recommendations Of Wheatley Libor Review In Full"
''Dow Jones Newswires / Fox Business''
Significant reforms, in line with the Wheatley Review, came into effect in 2013 and a new administrator took over in early 2014.
The
British government
ga, Rialtas a Shoilse gd, Riaghaltas a Mhòrachd
, image = HM Government logo.svg
, image_size = 220px
, image2 = Royal Coat of Arms of the United Kingdom (HM Government).svg
, image_size2 = 180px
, caption = Royal Arms
, date_es ...
regulates Libor through
criminal
In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Can ...
and
regulatory laws passed by
Parliament.
In particular, the
Financial Services Act 2012 brings Libor under UK regulatory oversight and creates a criminal offence for knowingly or deliberately making false or misleading statements relating to benchmark-setting.
Introduction
The London Interbank Offered Rate (LIBOR) came into widespread use in the 1970s as a reference interest rate for transactions in offshore
Eurodollar markets.
In 1984, it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably
interest rate swaps,
foreign currency options and
forward rate agreements. While recognizing that such instruments brought more business and greater depth to the London Inter-bank market, bankers worried that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984, the
British Bankers' Association (BBA)—working with other parties, such as the
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
—established various working parties, which eventually culminated in the production of the BBA standard for interest rate swaps, or "BBAIRS" terms. Part of this standard included the fixing of BBA interest-settlement rates, the predecessor of BBA Libor. From 2 September 1985, the BBAIRS terms became standard market practice. BBA Libor fixings did not commence officially before 1 January 1986. Before that date, however, some rates were fixed for a trial period commencing in December 1984.
Member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms as of 2008. Seventeen banks for example currently contribute to the fixing of US Dollar Libor. The panel contains the following member banks:
*
Bank of America
*
Bank of Tokyo-Mitsubishi UFJ
is the largest bank in Japan. It was established on January 1, 2006, following the merger of the Bank of Tokyo-Mitsubishi, Ltd. and UFJ Bank Ltd. MUFG is one of the three so-called Japanese "megabanks" (along with Sumitomo Mitsui Banking Corp ...
*
Barclays Bank
*
Citibank NA
*
Credit Agricole CIB
*
Credit Suisse
Credit Suisse Group AG is a global investment bank and financial services firm founded and based in Switzerland. Headquartered in Zürich, it maintains offices in all major financial centers around the world and is one of the nine global " ...
*
Deutsche Bank
*
HSBC
HSBC Holdings plc is a British multinational universal bank and financial services holding company. It is the largest bank in Europe by total assets ahead of BNP Paribas, with US$2.953 trillion as of December 2021. In 2021, HSBC had $10.8 tri ...
*
JP Morgan Chase
*
Lloyds Banking Group
*
Rabobank
*
Royal Bank of Canada
Royal Bank of Canada (RBC; french: Banque royale du Canada) is a Canadian multinational financial services company and the largest bank in Canada by market capitalization. The bank serves over 17 million clients and has more than 89,000& ...
*
Société Générale
*
Sumitomo Mitsui Banking Corporation Europe Ltd
*
Norinchukin Bank
*
Royal Bank of Scotland
The Royal Bank of Scotland plc (RBS; gd, Banca Rìoghail na h-Alba) is a major retail and commercial bank in Scotland. It is one of the retail banking subsidiaries of NatWest Group, together with NatWest (in England and Wales) and Ulster Bank ...
*
UBS AG
Scope
Libor is widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There are three major classifications of interest rate fixings instruments, including standard inter bank products, commercial field products, and hybrid products that often use Libor as their reference rate.
Standard interbank products:
*
Forward rate agreements
*
Interest rate future
An interest rate future is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative.
Examples include Treasury-bill futures, Treasury-bond futures ...
s, e.g.
Eurodollar futures
*
Interest rate swaps
*
Swaptions
*
Overnight indexed swap
An overnight indexed swap (OIS) is an interest rate swap (''IRS'') over some given term, e.g. 10Y, where the periodic fixed payments are tied to a given fixed rate while the periodic floating payments are tied to a floating rate calculated from ...
s, e.g. Libor–OIS spread
*
Interest rate options,
Interest rate cap and floor
Commercial field products:
*
Floating rate notes
*Floating rate
certificates of deposit
*
Syndicated loan
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers.
The syndicated loan market is the dominant way for larg ...
s
*
Variable rate mortgage
A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
s
*
Term loan {{Unreferenced, date=March 2018
A term loan is a monetary loan that is usually repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usua ...
s
Hybrid products:
*
Range accrual In finance, a range accrual is a type of derivative product very popular among structured note investors. It is estimated that more than US$160 billion of Range Accrual indexed on interest rates only have been sold to investors between 2004 and 2007 ...
notes
*Step up callable notes
*Target redemption notes
*Hybrid perpetual notes
*
Collateralized mortgage obligation
A collateralized mortgage obligation (CMO) is a type of complex debt security that repackages and directs the payments of principal and interest from a collateral pool to different types and maturities of securities, thereby meeting investor need ...
s
*
Collateralized debt obligations
In the United States in 2008, around sixty percent of
prime adjustable-rate mortgages and nearly all
subprime mortgages
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the coll ...
were indexed to the US dollar Libor.
In 2012, around 45 percent of prime adjustable rate mortgages and more than 80 percent of subprime mortgages were indexed to the Libor.
American municipalities also borrowed around 75 percent of their money through financial products that were linked to the Libor.
[LIBOR: Frequently Asked Questions ] In the UK, the three-month British pound Libor is used for some
mortgages—especially for those with adverse credit history. The Swiss franc Libor is also used by the
Swiss National Bank as their reference rate for monetary policy.
The usual reference rate for
euro denominated interest rate products, however, is the
Euribor compiled by the
European Banking Federation from a larger bank panel. A euro Libor does exist, but mainly, for continuity purposes in swap contracts dating back to pre-
EMU times. The Libor is an estimate and is not intended in the binding contracts of a company. It is, however, specifically mentioned as a reference rate in the market standard
International Swaps and Derivatives Association documentation, which are used by parties wishing to transact in over-the-counter
interest rate derivatives.
Definition
Libor is defined as:
This definition is amplified as follows:
* The rate that each bank submits must be formed from that bank's perception of its cost of funds in the inter-bank market.
* Contributions must represent rates formed in London and not elsewhere.
* Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.
* The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank's cash, rather than a bank's derivative book.
* The definition of "funds" is: unsecured inter-bank cash or cash raised through primary issuance of inter-bank certificates of deposit.
The British Bankers' Association published a basic guide to the BBA Libor, which contains a great deal of detail as to its history and its current calculation.
Technical features
Calculation
Libor is calculated by the
Intercontinental Exchange (ICE) and published by
Refinitiv. It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am?" The BBA throws out the highest four and lowest four responses, and averages the remaining middle ten, yielding a 22%
trimmed mean. The average is reported at 11:30 am.
Libor is actually a set of indexes. There are separate Libor rates reported for seven different maturities (length of time to repay a debt) for each of five currencies.
The shortest maturity is overnight, the longest is one year. In the United States, many private contracts reference the three-month dollar Libor, which is the index resulting from asking the panel what rate they would pay to borrow dollars for three months.
Currency
In 1986, the Libor initially fixed rates for three currencies. These were the
US dollar,
British pound sterling
Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, and t ...
and the
Deutsche Mark. Over time this grew to sixteen currencies. After a number of these currencies in 2000 merged into the euro, there remained ten currencies.
Following reforms of 2013 Libor rates are calculated for five currencies.
Active until June 2023
*US dollar (USD)
Inactive from December 2021
*
Euro (EUR)
*
British pound sterling
Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, and t ...
(GBP)
*
Japanese yen
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
(JPY)
*
Swiss franc
The Swiss franc is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) issues banknotes and the f ...
(CHF)
Inactive from 2013
*
Australian dollar (AUD)
*
Canadian dollar
The Canadian dollar ( symbol: $; code: CAD; french: dollar canadien) is the currency of Canada. It is abbreviated with the dollar sign $, there is no standard disambiguating form, but the abbreviation Can$ is often suggested by notable style ...
(CAD)
*
New Zealand dollar
The New Zealand dollar ( mi, tāra o Aotearoa; sign: $, NZ$; code: NZD) is the official currency and legal tender of New Zealand, the Cook Islands, Niue, the Ross Dependency, Tokelau, and a British territory, the Pitcairn Islands. Within New ...
(NZD)
*
Danish krone (DKK)
*
Swedish krona
The krona (; plural: ''kronor''; sign: kr; code: SEK) is the official currency of the Kingdom of Sweden. Both the ISO code "SEK" and currency sign "kr" are in common use; the former precedes or follows the value, the latter usually follows it ...
(SEK)
Note that the Euro LIBOR should not be confused with
EURIBOR.
Maturities
Until 1998, the shortest duration rate was one month, after which the rate for one week was added. In 2001, rates for a day and two weeks were introduced
Following reforms of 2013 Libor rates are calculated for 7 maturities.
Active until June 2023
*1 day
*1 month
*3 months
*6 months
*12 months
Inactive from December 2021
*1 week
*2 months
Inactive from 2013
*2 weeks
*4 months
*5 months
*7 months
*8 months
*9 months
*10 months
*11 months
Libor-based derivatives
Libor futures
GBP and CHF LIBOR futures are traded on
Intercontinental Exchange (ICE)
and on CurveGlobal, part of the
London Stock Exchange Group.
USD LIBOR futures (aka
Eurodollar futures) are traded on the
Chicago Mercantile Exchange
The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an a ...
. JPY LIBOR futures (aka
Euroyen
Eurocurrency is currency held on deposit outside its home market, i.e., held in banks located outside of the country which issues the currency. For example, a deposit of US dollars held in a bank in London, would be considered eurocurrency, as the ...
futures) are traded on the
Tokyo Financial Exchange and the
Chicago Mercantile Exchange
The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an a ...
.
Interest rate swaps
Interest rate swaps based on short Libor rates currently trade on the
interbank market for maturities up to 50 years. In the swap market a "five-year Libor" rate refers to the five-year swap rate where the floating leg of the swap references three- or six-month Libor (this can be expressed more precisely as for example "5-year rate vs 6-month Libor"). "Libor +
basis points", when talking about a bond, means that the bond's cash flows have to be discounted on the swaps' zero-coupon
yield curve shifted by basis points to equal the bond's actual market price. The
day count convention for Libor rates in interest rate swaps is Actual/360, except for the GBP currency for which it is Actual/365 (fixed).
Reliability and scandal
On Thursday, 29 May 2008, ''
The Wall Street Journal'' (WSJ) released a controversial study suggesting that banks might have understated borrowing costs they reported for Libor during the 2008 credit crunch.
Such under-reporting could have created an impression that banks could borrow from other banks more cheaply than they could in reality. It could also have made the banking system or specific contributing bank appear healthier than it was during the 2008 credit crunch. For example, the study found that rates at which one major bank (Citigroup) "said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-insurance data."
In September 2008, a former member of the
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
's
Monetary Policy Committee,
Willem Buiter, described Libor as "the rate at which banks don't lend to each other", and called for its replacement. The former
Governor of the Bank of England,
Mervyn King, later used the same description before the
Treasury Select Committee.
To further bring this case to light, ''The Wall Street Journal'' reported in March 2011 that regulators were focusing on Bank of America Corp., Citigroup Inc. and UBS AG. Making a case would be very difficult because determining the Libor rate does not occur on an open exchange. According to people familiar with the situation, subpoenas were issued to the three banks.
In response to the study released by the WSJ, the British Bankers' Association announced that Libor continues to be reliable even in times of financial crisis. According to the British Bankers' Association, other proxies for financial health, such as the default-credit-insurance market, are not necessarily more sound than Libor at times of financial crisis, though they are more widely used in Latin America, especially the Ecuadorian and Bolivian markets.
Additionally, some other authorities contradicted the Wall Street Journal article. In its March 2008 Quarterly Review, The
Bank for International Settlements has stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."
Further, in October 2008 the
International Monetary Fund published its regular ''Global Financial Stability Review'', which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank's marginal cost of unsecured U.S. dollar term funding."
On 27 July 2012, the ''
Financial Times'' published an article by a former trader that stated Libor manipulation had been common since at least 1991. Further reports on this have since come from the BBC and Reuters. On 28 November 2012, the Finance Committee of the
Bundestag held a hearing to learn more about the issue.
In late September 2012, Barclays was fined £290m because of its attempts to manipulate the Libor, and other banks are under investigation of having acted similarly. Wheatley called for the
British Bankers' Association to lose its power to determine Libor and for the FSA to be able to impose criminal sanctions as well as other changes in a ten-point overhaul plan.
The British Bankers' Association said on 25 September that it would transfer oversight of LIBOR to UK regulators, as proposed by
Financial Services Authority
The Financial Services Authority (FSA) was a quasi-judicial body accountable for the financial regulation, regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investmen ...
managing director
Martin Wheatley and CEO-designate of the new
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
.
On 28 September, Wheatley's independent review was published, recommending that an independent organisation with government and regulator representation, called the
Tender Committee
Tender may refer to:
Entertainment Film
* ''Illegal Tender'' (2007), a film directed by Franc. Reyes
* ''Tender'' (2012), a short film by Liz Tomkins
* ''Tender'' (2019), a short film by Darryl Jones and Anthony Lucido
* ''Tender'' (2019), a sh ...
, manage the process of setting LIBOR under a new external oversight process for transparency and accountability. Banks that make submissions to LIBOR would be required to base them on actual inter-bank deposit market transactions and keep records of their transactions supporting those submissions. The review also recommended that individual banks' LIBOR submissions be published, but only after three months, to reduce the risk that they would be used as a measure of the submitting banks' creditworthiness. The review left open the possibility that regulators might compel additional banks to participate in submissions if an insufficient number do voluntarily. The review recommended criminal sanctions specifically for manipulation of benchmark interest rates such as the LIBOR, saying that existing criminal regulations for manipulation of financial instruments were inadequate.
[Alexis Levine and Michael Harquail (5 October 2012]
"Wheatley Review May Mean Big Changes for LIBOR"
''Blakes Business'' (Blake, Cassels & Graydon LLP) LIBOR rates may be higher and more volatile after implementation of these reforms, so financial institution customers may experience higher and more volatile borrowing and hedging costs.
[Karen Brettell (28 September 2012]
"Libor reform may add volatility, increase some funding costs"
Reuters The UK government agreed to accept all of the Wheatley Review's recommendations and press for legislation implementing them.
Bloomberg LP CEO
Dan Doctoroff
Daniel Louis Doctoroff (born July 11, 1958) is an American businessman and former government official. He is the chief executive officer of Sidewalk Labs, a startup company developing technology focused on city life. Previously, he was the CEO an ...
told the
European Parliament that
Bloomberg LP could develop an alternative index called the Bloomberg Interbank Offered Rate that would use data from transactions such as market-based quotes for
credit default swap transactions and corporate bonds.
Criminal investigations
On 28 February 2012, it was revealed that the
US Department of Justice was conducting a criminal investigation into Libor abuse. Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an advantage in predicting that day's fixing. Libor underpins approximately $350 trillion in
derivatives. One trader's messages indicated that for each basis point (0.01%) that Libor was moved, those involved could net "about a couple of million dollars".
On 27 June 2012,
Barclays Bank was fined $200m by the
Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Ac ...
,
$160m by the
United States Department of Justice and £59.5m by the
Financial Services Authority
The Financial Services Authority (FSA) was a quasi-judicial body accountable for the financial regulation, regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investmen ...
for attempted manipulation of the Libor and Euribor rates. The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".
On 2 July 2012,
Marcus Agius, chairman of Barclays, resigned from the position following the interest rate rigging scandal.
Bob Diamond, the chief executive officer of Barclays, resigned on 3 July 2012. Marcus Agius was to fill his post until a replacement is found. Jerry del Missier, chief operating officer of Barclays, also resigned. Del Missier subsequently admitted that he had instructed his subordinates to submit falsified LIBORs to the British Bankers Association.
By 4 July 2012, the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal. On 6 July, it was announced that the UK
Serious Fraud Office had also opened a criminal investigation into the attempted manipulation of interest rates.
On 4 October 2012, Republican
US Senators
The United States Senate is the upper chamber of the United States Congress, with the House of Representatives being the lower chamber. Together they compose the national bicameral legislature of the United States.
The composition and powe ...
Chuck Grassley and
Mark Kirk announced that they were investigating
Treasury Secretary Timothy Geithner for complicity with the rate manipulation scandal. They accused Geithner of knowledge of the rate-fixing, and inaction which contributed to litigation that "threatens to clog our courts with multi-billion dollar class action lawsuits" alleging that the manipulated rates harmed state, municipal and local governments. The senators said that an American-based interest rate index is a better alternative which they would take steps towards creating.
Aftermath
Early estimates are that the rate manipulation scandal cost US states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation.
Reforms
The administration of Libor has itself become a regulated activity overseen by the UK's
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
.
Furthermore, knowingly or deliberately making false or misleading statements in relation to benchmark-setting was made a criminal offence in UK law under the
Financial Services Act 2012.
The Danish, Swedish, Canadian, Australian and New Zealand Libor rates have been terminated.
From the end of July 2013, only five currencies and seven maturities will be quoted every day (35 rates), reduced from 150 different Libor rates – 15 maturities for each of ten currencies, making it more likely that the rates submitted are underpinned by real trades.
Since the beginning of July 2013, each individual submission that comes in from the banks is embargoed for three months to reduce the motivation to submit a false rate to portray a flattering picture of creditworthiness.
A new code of conduct, introduced by a new interim oversight committee, builds on this by outlining the systems and controls firms need to have in place around Libor. For example, each bank must now have a named person responsible for Libor, accountable if there is any wrongdoing. The banks must keep records so that they can be audited by the regulators if necessary.
In early 2014,
NYSE Euronext took over the administration of Libor from the
British Bankers Association. The new administrator was NYSE Euronext Rates Administration Limited, a London-based, UK registered company, regulated by the UK's
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
.
On 13 November 2013, the Intercontinental Exchange (ICE) Group announced the successful completion of its acquisition of NYSE Euronext. As a result of this acquisition, NYSE Euronext Rate Administration Limited was renamed ICE Benchmark Administration Limited. The appointment of a new administrator is a major step forward in the reform of LIBOR.
[ICE Benchmark Administration Ltd take responsibility for administrating LIBOR](_blank)
,
The scandal also led to the
European Commission proposal of EU-wide benchmark regulation that may affect Libor as well.
LIBOR cessation and alternatives available
Due to multiple factors, including the
Libor scandal, concerns about the rates' accuracy, and changes in how banks do business, the decision was made to phase out Libor.
Most LIBOR settings will stop being issued or become unrepresentative at the end of 2021, while certain U.S. dollar settings will continue to be provided until the end of June 2023.
The
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
may continue to publish certain synthetic rates after these dates for loans that cannot easily be transitioned.
According to a March 2021 estimate, major banks will spend more than US$100 million transitioning away from LIBOR.
From January 2022, the lending rate cannot be used as the reference rate in any new derivatives contracts, loans and credit card offers.
A variety of replacements for LIBOR have been offered.
In some cases, banks allow their customers to choose which rate to track.
Alternatives for the USD LIBOR
Alternative Reference Rates Committee
In 2014 the
U.S. Federal Reserve Board and the
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the State of New York, the 12 northern counties of New ...
announced the creation of the Alternative Rates Reference Committee (ARRC) to assess viable alternatives to the LIBOR.
In 2016 the ARRC released its first report on the possible indices that could serve as a replacement to the LIBOR.
On March 7, 2018 the ARRC announced that the committee had been reconstituted and the following groups were participating.
The ARRC will comprise the following institutions:
*
AXA
Axa S.A. (styled as ''AXA'' or GIG in the Middle East) is a French multinational insurance company. The head office is in the 8th arrondissement of Paris, France. It also provides investment management and other financial services.
The Ax ...
*
Bank of America
*
BlackRock
*
Citigroup
Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
*
CME Group
CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset class ...
*
Deutsche Bank
*
Federal National Mortgage Association
*
Federal Home Loan Mortgage Corporation
*
GE Capital
*
Goldman Sachs
Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...
*
Government Finance Officers Association
*
HSBC
HSBC Holdings plc is a British multinational universal bank and financial services holding company. It is the largest bank in Europe by total assets ahead of BNP Paribas, with US$2.953 trillion as of December 2021. In 2021, HSBC had $10.8 tri ...
*
Intercontinental Exchange
*
International Swaps and Derivatives Association
*
JP Morgan Chase & Co.
*
LCH Clearnet
LCH (originally London Clearing House) is a British clearing house group that serves major international exchanges, as well as a range of OTC markets. The LCH Group consists of two subsidiaries: LCH Ltd (based in London) and LCH SA (based in Pa ...
*
MetLife
MetLife, Inc. is the holding corporation for the Metropolitan Life Insurance Company (MLIC), better known as MetLife, and its affiliates. MetLife is among the largest global providers of insurance, annuities, and employee benefit programs, wi ...
*
Morgan Stanley
*
National Association of Corporate Treasurers
*
Pacific Investment Management Company
*
TD Bank
* The
Federal Home Loan Bank of New York
* The
Independent Community Bankers of America
* The
Loan Syndications and Trading Association
* The
Securities Industry and Financial Markets Association
*
Wells Fargo
*
World Bank Group
In addition, the following agencies will serve as
ex officio
An ''ex officio'' member is a member of a body (notably a board, committee, council) who is part of it by virtue of holding another office. The term '' ex officio'' is Latin, meaning literally 'from the office', and the sense intended is 'by right ...
members of the ARRC:
*
Board of Governors of the Federal Reserve System
*
Consumer Financial Protection Bureau
*
Federal Deposit Insurance Corporation
*
Federal Housing Finance Agency
*
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the State of New York, the 12 northern counties of New ...
*
Office of Financial Research
*
Office of the Comptroller of the Currency
*
U.S. Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Act ...
*
U.S. Securities and Exchange Commission
*
U.S. Treasury Department
Secured Overnight Financing Rate
In June 2017, the ARRC announced a broad Treasury repo financing rate,
SOFR, as its recommended alternative to the USD LIBOR. In its justification for this choice the ARRC said:
Ameribor
Ameribor is a benchmark interest rate created by the American Financial Exchange. Ameribor reflects the actual borrowing costs of thousands of small, medium and regional banks across America, but it is also useful for larger banks and financial institutions that do business with these banks, as well as small and middle market companies. Ameribor has traded more than $550 billion since inception in 2015. In addition, the AFX launched Ameribor futures on August 16, 2019.
U.S. Dollar ICE Bank Yield Index
The
U.S. Dollar ICE Bank Yield Index The U.S. Dollar ICE Bank Yield Index is an index proposed by Intercontinental Exchange Benchmark Administration (IBA) in January 2019 to measure the yields at which investors are willing to lend U.S. dollar funds to large, internationally active ban ...
is an index proposed by Intercontinental Exchange Benchmark Administration (IBA) in January 2019 to measure the yields at which investors are willing to lend U.S. dollar funds to large, internationally active banks on a wholesale, unsecured basis over one-month, three-month and six-month periods.
Its usage is intended to be similar to how Libor is currently used.
Alternatives for Yen LIBOR
Tokyo Overnight Average Rate Tokyo Overnight Average Rate (TONA rate or TONAR) or Japanese Yen Uncollateralized Overnight Call Rate ( ja, 無担保コールO/N物レート) is an unsecured interbank overnight interest rate and reference rate for Japanese yen. Mutan rate and TO ...
(TONAR).
See also
*
Interbank lending market
*
Libor scandal
*
Euribor
*
JIBAR The Johannesburg Interbank Agreed Rate{{cite web, title=A review of the rate-setting process of the Johannesburg Interbank Agreed Rate (Jibar) as an interest rate benchmark, url=https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/5 ...
*
LIBID
The London Interbank Bid Rate (LIBID) is a bid rate; the rate bid by banks on Eurocurrency deposits (i.e., the rate at which a bank is willing to borrow from other banks). It is the "other end" of the LIBOR (an offered, hence "ask" rate, the rate ...
*
Libor-OIS spread
*
SHIBOR
*
SONIA
*
SOFR
*
Ted spread
The TED spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt ("T-bills"). TED is an acronym formed from ''T-Bill'' and ''ED'', the ticker symbol for the Eurodollar futures contract.
Init ...
*
TIBOR
*
SIBOR
*
HIBOR
*
LIBOR market model
Further reading
* Carrick Mollenkamp and Mark Whitehouse, "Study Casts Doubt on Key Rate: WSJ Analysis Suggests Banks May Have Reported Flawed Interest Data for Libor", ''
The Wall Street Journal'', Thursday, 29 May 2008, p. 1.
* Donald MacKenzie
"What's in a Number?" ''
London Review of Books
The ''London Review of Books'' (''LRB'') is a British literary magazine published twice monthly that features articles and essays on fiction and non-fiction subjects, which are usually structured as book reviews.
History
The ''London Review of ...
'', 25 September 2008, pp. 11–12.
*
Matt TaibbiEverything Is Rigged: The Biggest Price-Fixing Scandal Ever Rolling Stone 25 April 2013
*
References
External links
1 year LIBOR rate at MoneyCafe.com with historical data and graphThe Wheatley Review of LIBOR: Final Report*
Financial Timesarticle list
{{Authority control
Banking
Interest rates
United States housing bubble
1984 introductions
Reference rates
Swaps (finance)