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The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in
London London is the capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowerc ...

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 The Intercontinental Exchange (ICE) is an American Fortune 500 company formed in 2000 that operates global exchanges, clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial Fin ...
Libor). It was formerly known as BBA Libor (for
British Bankers' Association The British Bankers' Association (BBA) was a trade association for the UK banking and financial services sector. From 1 July 2017, it was merged into UK Finance. It represented members from a wide range of banking and financial services. The Assoc ...
Libor or the trademark bba libor) before the responsibility for the administration was transferred to
Intercontinental Exchange The Intercontinental Exchange (ICE) is an American Fortune 500 company formed in 2000 that operates global exchanges, clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial Fin ...
. It is the primary benchmark, along with the
Euribor The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rate An interest rate is the amount of interest Interest, in finance and economics, is pa ...

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. 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 Thomson Reuters Corporation () is a Canadian-American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple co ...
. Many financial institutions, mortgage lenders, and credit card agencies set their own rates relative to it. At least $350
trillion A trillion is a number with two distinct definitions: * 1,000,000,000,000, i.e. one million million, or (ten to the twelfth power Power typically refers to: * Power (physics) In physics, power is the amount of energy transferred or converted ...
in
derivatives Derivative may refer to: In mathematics and economics *Brzozowski derivative in the theory of formal languages *Derivative in calculus, a quantity indicating how a function changes when the values of its inputs change. *Formal derivative, an opera ...
and other financial products are tied to Libor. In June 2012, multiple criminal settlements by
Barclays Bank Barclays plc () is a British multinational Investment banking, investment bank and financial services company, headquartered in London, England. Apart from investment banking, Barclays is organised into four core businesses: Retail banking, per ...

Barclays Bank
revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the
Libor scandal The Libor scandal was a series of fraudulent actions connected to the (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by maj ...
. 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 Investments ...
managing director
Martin Wheatley Martin Wheatley is a British financier, formerly managing director of the Consumer and Markets Business Unit of the Financial Services Authority in the UK, and is the former CEO of the Financial Conduct Authority. In London Wheatley worked for th ...
'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 The Government of the United Kingdom, domestically referred to as Her Majesty's Government, is the central government of the United Kingdom of Great Britain and Northern Ireland.
regulates Libor through
criminal In ordinary language, a crime is an unlawful act punishable by a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper ...
and
regulatory Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
laws passed by
Parliament In modern politics and history, a parliament is a legislative A legislature is an assembly Assembly may refer to: Organisations and meetings * Deliberative assembly A deliberative assembly is a gathering of members (of any kind of ...
. In particular, the
Financial Services Act 2012 The Financial Services Act 2012 is an Act of Parliament, Act of the Parliament of the United Kingdom which implements a new regulatory framework for the financial system and financial services in the UK. It replaces the Financial Services Authority ...
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 Eurodollars are time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located i ...
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 swap In finance, an interest rate swap (finance), swap (IRS) is an interest rate derivative, interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a Interest_rate_derivative#Linear_and_non-linear ...
s, foreign currency options and
forward rate agreementIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
s. 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 The British Bankers' Association (BBA) was a trade association for the UK banking and financial services sector. From 1 July 2017, it was merged into UK Finance. It represented members from a wide range of banking and financial services. The Assoc ...
(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 Kingdom of England, English Government's banker, and still one of the bankers for t ...

Bank of England
—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 The Bank of America Corporation (simply referred to as Bank of America, often abbreviated as BofA or BoA) is an American multinational investment bank Investment is the dedication of an asset to attain an increase in value over a period o ...

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 Corpo ...
*
Barclays Bank Barclays plc () is a British multinational Investment banking, investment bank and financial services company, headquartered in London, England. Apart from investment banking, Barclays is organised into four core businesses: Retail banking, per ...

Barclays Bank
* Citibank NA * Credit Agricole CIB *
Credit Suisse Credit Suisse Group AG is a global investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In f ...

Credit Suisse
*
Deutsche Bank Deutsche Bank AG () is a German multinational investment bank To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the ...

Deutsche Bank
*
HSBC HSBC Holdings plc is a British multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational state, ...

HSBC
*
JP Morgan Chase JPMorgan Chase & Co. is an American Investment banking, investment bank and financial services holding company headquartered in City of New York, New York City. JPMorgan Chase is Delaware General Corporation Law, incorporated in Delaware. As ...
*
Lloyds Banking Group Lloyds Banking Group plc is a British financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by ...

Lloyds Banking Group
*
Rabobank Rabobank (; full name: ''Coöperatieve Rabobank U.A.'') is a Dutch multinational banking and financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad ran ...

Rabobank
*
Royal Bank of Canada Royal Bank of Canada (RBC; french: Banque royale du Canada) is a Canadian Canadians (french: Canadiens) are people identified with the country of Canada. This connection may be residential, legal, historical or cultural. For most Canadian ...
*
Société Générale Société Générale S.A. (), often nicknamed "SocGen" (), is a French multinational Investment banking, investment bank and financial services company headquartered in Paris, France. The company is a universal bank and has divisions supporting ...

Société Générale
* *
Norinchukin Bank The is a Japanese cooperative bank The Co-operative Bank plc is a retail and commercial bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously maki ...
*
Royal Bank of Scotland The Royal Bank of Scotland ( gd, Banca Rìoghail na h-Alba, commonly abbreviated as RBS) is a major retail banking, retail and commercial bank in Scotland. It is one of the retail banking subsidiaries of NatWest Group, together with NatWest (in ...
*
UBS AG UBS Group AG is a Swiss multinational investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In ...


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 which often use Libor as their reference rate. Standard interbank products: *
Forward rate agreementIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
s *
Interest rate future An interest rate future is a financial derivative In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset In financial accountancy, financial accoun ...
s, e.g.
Eurodollar Eurodollars are time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located i ...
futures *
Interest rate swap In finance, an interest rate swap (finance), swap (IRS) is an interest rate derivative, interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a Interest_rate_derivative#Linear_and_non-linear ...
s *
Swaption A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to options on interest rate swap In finance ...
s *
Overnight indexed swap An overnight indexed swap (OIS) is an interest rate swap In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money ...
s, e.g. Libor–OIS spread * Interest rate options,
Interest rate cap and floor An interest rate cap is a type of interest rate derivative In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money ...
Commercial field products: *
Floating rate note Floating rate notes (FRNs) are bonds that have a variable coupon In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacture ...
s *Floating rate
certificates of deposit A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, Savings and loan association, thrift institutions, and credit unions. CDs differ from Savings deposit, savings accounts in that the CD has a specific, fix ...

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 la ...
s * Variable rate mortgages * Term loans Hybrid products: * Range accrual 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 needs. ...
s *
Collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security An asset-backed security (ABS) is a Security (finance), security whose income payments and hence value are derived from and collateralized (or "backed") by a spe ...
s In the United States in 2008, around sixty percent of
prime A prime number (or a prime) is a natural number greater than 1 that is not a Product (mathematics), product of two smaller natural numbers. A natural number greater than 1 that is not prime is called a composite number. For example, 5 is prime ...
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or oth ...
s and nearly all subprime mortgages 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 A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
—especially for those with adverse credit history. The Swiss franc Libor is also used by the
Swiss National Bank french: Banque nationale suisse it, Banca nazionale svizzera rm, Banca naziunala svizra , image_1 = SNB-Logo-positiv-blau.svg , image_title_1 = Logo , image_2 = , image_title_2 = , ownership = Mixed ownership. Around 55% owned by Swiss pub ...
as their reference rate for monetary policy. The usual reference rate for
euro The euro (currency symbol, symbol: euro sign, €; ISO 4217, code: EUR) is the official currency of 19 of the Member state of the European Union, member states of the European Union. This group of states is known as the eurozone or euro area ...

euro
denominated interest rate products, however, is the
Euribor The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rate An interest rate is the amount of interest Interest, in finance and economics, is pa ...

Euribor
compiled by the
European Banking Federation The European Banking Federation (abbreviated EBF or FBE in French) is a trade association that represents 32 national banking associations in the European Union, EU and EFTA countries. It represents over 3,500 banks and about two million employees ...
from a larger bank panel. A euro Libor does exist, but mainly, for continuity purposes in swap contracts dating back to pre-
EMU The emu (''Dromaius novaehollandiae'') is the second-largest living bird by height, after its ratite relative, the ostrich. It is endemic Endemism is the state of a species In biology, a species is the basic unit of biological c ...
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 The International Swaps and Derivatives Association (ISDA ) is a trade organization of participants in the market for over-the-counter derivatives. Headquartered in New York City New York, often called New York City to distinguish it from ...
documentation, which are used by parties wishing to transact in over-the-counter
interest rate derivative In , an interest rate derivative (IRD) is a whose payments are determined through calculation techniques where the underlying benchmark product is an , or set of different interest rates. There are a multitude of different that can be used in thi ...
s.


Definition

Libor is defined as: ''The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.'' This definition is amplified as follows: * The rate which 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 publishes 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 The Intercontinental Exchange (ICE) is an American Fortune 500 company formed in 2000 that operates global exchanges, clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial Fin ...
(ICE) and published by
Refinitiv Refinitiv is a global provider of financial market data and infrastructure. The company was founded in 2018. It is a subsidiary of London Stock Exchange Group after a US$27 billion dollar sale from previous owners Blackstone Group The Blacks ...
. 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 A truncated mean or trimmed mean is a statistical measure of central tendency, much like the mean and median In statistics and probability theory, the median is the value separating the higher half from the lower half of a Sample (statistics) ...
. 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 5 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 The United States dollar (symbol A symbol is a mark, sign, or that indicates, signifies, or is understood as representing an , , or . Symbols allow people to go beyond what is n or seen by creating linkages between otherwise very diffe ...
,
British pound sterling The pound sterling (symbol: £; ISO code: GBP), known in some contexts simply as the pound or sterling, is the official currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the ...
and the
Deutsche Mark The Deutsche Mark (, "German mark"), abbreviated "DM" or "D-Mark" (), was the official currency of West Germany from 1948 until 1990 and later the unified Germany from 1990 until the adoption of the euro in 2002. In English, it is commonly call ...

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 5 currencies. Active *US dollar (USD) *
Euro The euro (currency symbol, symbol: euro sign, €; ISO 4217, code: EUR) is the official currency of 19 of the Member state of the European Union, member states of the European Union. This group of states is known as the eurozone or euro area ...

Euro
(EUR) *
British pound sterling The pound sterling (symbol: £; ISO code: GBP), known in some contexts simply as the pound or sterling, is the official currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the ...
(GBP) *
Japanese yen The is the official currency of Japan. It is the third most traded currency in the foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized Decentralization or decentralisation ...

Japanese yen
(JPY) * Swiss franc (CHF) Inactive *
Australian dollar The Australian dollar (sign A sign is an object Object may refer to: General meanings * Object (philosophy), a thing, being, or concept ** Entity, something that is tangible and within the grasp of the senses ** Object (abstract), ...
(AUD) *
Canadian dollar The Canadian dollar (symbol A symbol is a mark, sign, or that indicates, signifies, or is understood as representing an , , or . Symbols allow people to go beyond what is n or seen by creating linkages between otherwise very different ...
(CAD) * New Zealand dollar (NZD) *
Danish krone The krone (; plural: ''kroner''; sign A sign is an object Object may refer to: General meanings * Object (philosophy), a thing, being, or concept ** Entity, something that is tangible and within the grasp of the senses ** Object (abs ...
(DKK) *
Swedish krona The krona (; plural: ''kronor''; sign A sign is an object Object may refer to: General meanings * Object (philosophy), a thing, being, or concept ** Entity, something that is tangible and within the grasp of the senses ** Object (ab ...
(SEK) Note that the Euro LIBOR should not be confused with
EURIBOR The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rate An interest rate is the amount of interest Interest, in finance and economics, is pa ...

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 *1 day *1 week *1 month *2 months *3 months *6 months *12 months Inactive *2 weeks *4 months *5 months *7 months *8 months *9 months *10 months *11 months


Libor-based derivatives


Libor futures

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 ...

Chicago Mercantile Exchange
's
Eurodollar Eurodollars are time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located i ...
contracts are based on three-month US dollar Libor rates. They are the world's most heavily traded short-term interest rate futures contracts and extend up to ten years. Shorter maturities trade on the
Singapore Exchange Singapore Exchange Limited (SGX, ) is an investment holding company located in Singapore Singapore (), officially the Republic of Singapore, is a sovereign state, sovereign island city-state in maritime Southeast Asia. It lies about one ...
( UTC+08:00 time zone). GBP and CHF LIBOR futures are traded on
Intercontinental Exchange The Intercontinental Exchange (ICE) is an American Fortune 500 company formed in 2000 that operates global exchanges, clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial Fin ...
(ICE) and on CurveGlobal, part of the
London Stock Exchange Group London Stock Exchange Group plc (LSEG) is a United Kingdom-based stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell s ...
.


Interest rate swaps

Interest rate swap In finance, an interest rate swap (finance), swap (IRS) is an interest rate derivative, interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a Interest_rate_derivative#Linear_and_non-linear ...
s based on short Libor rates currently trade on the
interbank market The interbank market is the top-level foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) market for the tradin ...
for maturities up to 50 years. In the swap market a "five-year Libor" rate refers to the 5-year swap rate where the floating leg of the swap references 3- or 6-month Libor (this can be expressed more precisely as for example "5-year rate vs 6-month Libor"). "Libor + ''x''
basis point A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is (a difference of) one hundredth of a percent or equivalently one percent of one percent or one ten thousandth. A very rarely used term, permyriad, means parts per te ...
s", when talking about a bond, means that the bond's cash flows have to be discounted on the swaps' zero-coupon
yield curve In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...

yield curve
shifted by ''x'' basis points to equal the bond's actual market price. The
day count conventionIn finance, a day count convention determines how interest accrues over time for a variety of investments, including bond (finance), bonds, notes, loans, Mortgage loan, mortgages, medium-term notes, Swap (finance), swaps, and forward rate agreements ...
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 ''The Wall Street Journal'', also known as ''The Journal'', is an American business-focused, English-language international daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or sim ...

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 Kingdom of England, English Government's banker, and still one of the bankers for t ...

Bank of England
's
Monetary Policy CommitteeMonetary Policy Committee (MPC) may refer to: * Monetary Policy Committee (India) of the Reserve Bank of India * Monetary Policy Committee (United Kingdom) The Monetary Policy Committee (MPC) is a committee of the Bank of England, which meets ...
,
Willem Buiter Willem Hendrik Buiter CBE (born 26 September 1949) is an American- British economist. He spent most of his career as an academic, teaching at various universities. More recently, he was Chief Economist at Citigroup Citigroup Inc. or Citi (S ...
, 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 The Governor of the Bank of England is the most senior position in the Bank of England. It is nominally a civil service post, but the appointment tends to be from within the bank, with the incumbent grooming their successor. The Governor of the Ban ...
,
Mervyn KingMervyn King may refer to: *Mervyn King, Baron King of Lothbury (born 1948), British economist, former governor of the Bank of England *Mervyn King (judge) (born 1937), former judge of the Supreme Court of South Africa and chairman of the King Commit ...
, later used the same description before the
Treasury Select Committee The House of Commons Treasury Committee (often referred to as the Treasury Select Committee) is a select committee of the House of Commons The House of Commons is the name for the elected lower house of the bicameral parliaments of the United Ki ...
. 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 The Bank for International Settlements (BIS) is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject ...

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 The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C. ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument 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 The ''Financial Times'' (''FT'') is a daily newspaper printed in broadsheet and published digitally that focuses on business and economic Current affairs (news format), current affairs. Based in London, England, the paper is owned by a Japanese ...
'' published an article by a former trader which stated that 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 The Bundestag (, "Federal diet (assembly), Diet") is the Germany, German Federalism, federal parliament. It is the only body that is directly elected by the German people on the federal level. It can be compared to a lower house similar to 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 Investments ...
managing director
Martin Wheatley Martin Wheatley is a British financier, formerly managing director of the Consumer and Markets Business Unit of the Financial Services Authority in the UK, and is the former CEO of the Financial Conduct Authority. In London Wheatley worked for th ...
and CEO-designate of the new
Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Tel ...
. On 28 September, Wheatley's independent review was published, recommending that an independent organisation with government and regulator representation, called the Tender Committee, 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 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 derivative (finance), 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 Barclays plc () is a British multinational Investment banking, investment bank and financial services company, headquartered in London, England. Apart from investment banking, Barclays is organised into four core businesses: Retail banking, per ...

Barclays Bank
was fined $200m by the Commodity Futures Trading Commission, $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 Investments ...
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 (banker), 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 (United Kingdom), Serious Fraud Office had also opened a criminal investigation into the attempted manipulation of interest rates. On 4 October 2012, Republican United States Senate, US Senators Chuck Grassley and Mark Kirk announced that they were investigating United States Treasury Secretary, 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 regulatory body in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Tel ...
. 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 Financial Services Act 2012 is an Act of Parliament, Act of the Parliament of the United Kingdom which implements a new regulatory framework for the financial system and financial services in the UK. It replaces the Financial Services Authority ...
. 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 regulatory body in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Tel ...
. 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
,
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 The Libor scandal was a series of fraudulent actions connected to the (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by maj ...
, 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 regulatory body in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Tel ...
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 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 *
Bank of America The Bank of America Corporation (simply referred to as Bank of America, often abbreviated as BofA or BoA) is an American multinational investment bank Investment is the dedication of an asset to attain an increase in value over a period o ...

Bank of America
* BlackRock * Citigroup * CME Group *
Deutsche Bank Deutsche Bank AG () is a German multinational investment bank To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the ...

Deutsche Bank
* Federal National Mortgage Association * Federal Home Loan Mortgage Corporation * GE Capital * Goldman Sachs * Government Finance Officers Association *
HSBC HSBC Holdings plc is a British multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational state, ...

HSBC
*
Intercontinental Exchange The Intercontinental Exchange (ICE) is an American Fortune 500 company formed in 2000 that operates global exchanges, clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial Fin ...
*
International Swaps and Derivatives Association The International Swaps and Derivatives Association (ISDA ) is a trade organization of participants in the market for over-the-counter derivatives. Headquartered in New York City New York, often called New York City to distinguish it from ...
* JP Morgan Chase & Co. * LCH Clearnet * MetLife * Morgan Stanley * National Association of Corporate Treasurers * Pacific Investment Management Company * Toronto-Dominion Bank, 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 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 * Office of Financial Research * Office of the Comptroller of the Currency * U.S. Commodity Futures Trading Commission * 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 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 (TONAR).


See also

*Interbank lending market *
Libor scandal The Libor scandal was a series of fraudulent actions connected to the (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by maj ...
*
Euribor The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rate An interest rate is the amount of interest Interest, in finance and economics, is pa ...

Euribor
*JIBAR *LIBID *Libor-OIS spread *SHIBOR *SONIA *SOFR *Ted spread *TIBOR *SIBOR *HIBOR


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 ''The Wall Street Journal'', also known as ''The Journal'', is an American business-focused, English-language international daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or sim ...

The Wall Street Journal
'', Thursday, 29 May 2008, p. 1. * Donald MacKenzie
"What's in a Number?"
''London Review of Books'', 25 September 2008, pp. 11–12. * Matt Taibbi
Everything 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 Times The ''Financial Times'' (''FT'') is a daily newspaper printed in broadsheet and published digitally that focuses on business and economic Current affairs (news format), current affairs. Based in London, England, the paper is owned by a Japanese ...

article list
{{Authority control Banking Interest rates United States housing bubble 1984 introductions Reference rates Swaps (finance)