A reference rate is a rate that determines pay-offs in a financial contract and that is outside the control of the parties to the contract. It is often some form of
LIBOR
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 u ...
rate, but it can take many forms, such as a
consumer price index
A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.
Overview
A CPI is a statistica ...
, a house price index or an
unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
. Parties to the contract choose a reference rate that neither party has power to manipulate.
Examples of use
The most common use of reference rates is that of short-term interest rates such as LIBOR in
floating rate note
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant. Almost all ...
s,
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 debt and is usually liable to pay interest on that d ...
s,
swaps, short-term interest rate
futures contract
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s, etc. The rates are calculated by an independent organisation, such as 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 ass ...
(BBA) as the average of the rates quoted by a large panel of banks, to ensure independence.
Another example is that of swap reference rates for
constant maturity swaps. The
ISDAfix rates used are calculated daily for an independent organisation, the
International Swaps and Derivatives Association
International is an adjective (also used as a noun) meaning "between nations".
International may also refer to:
Music Albums
* ''International'' (Kevin Michael album), 2011
* ''International'' (New Order album), 2002
* ''International'' (The T ...
, from quotes from a large panel of banks.
In the
credit derivative
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the '' credit risk''"The Economist ''Passing on the risks'' 2 November 1996 or the risk of an event of default of a co ...
market a similar concept to reference rates is used. Pay offs are not determined by a ''rate'', but by possible ''events''. In this case, the ''reference event'' has to be a very precisely defined
credit event
A credit event occurs when a person or organization defaults on a significant transaction. He or she is unable to honor the terms of the contract entered, and the borrower’s ability to pay comes into question. Because the marketplace recognizes s ...
, to make sure there can be no disagreement on whether the event has occurred or not..
Typically the benchmark LIBOR is the three-month rate.
Reference rates for short-term interest rates
Examples of reference rates for short-term interest rates are:
*
LIBOR
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 u ...
- London Interbank Offered Rate. LIBOR will be terminated in June 2023.
*
SOFR
Secured Overnight Financing Rate (SOFR) is a secured interbank overnight interest rate. SOFR is a reference rate (that is, a rate used by parties in commercial contracts that is outside their direct control) established as an alternative to LIBOR. ...
- Secured Overnight Financing Rate. SOFR is a reference rate established as an alternative to LIBOR.
*
Euribor
The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro whole ...
- Euro Interbank Offered Rate
*
EONIA - Euro OverNight Index Average. EONIA will be replaced with €STR.
*
€STR Euro short-term rate (€STR) is a reference rate for the currency euro. The €STR is calculated by the European Central Bank (ECB) and is based on the money market statistical reporting of the Eurosystem. The working group on euro risk-free rates ...
- Euro short-term rate
*
TIBOR Tibor is a masculine given name found throughout Europe.
There are several explanations for the origin of the name:
* from Latin name Tiberius, which means "from Tiber", Tiber being a river in Rome.
* in old Slavic languages, Tibor means "sacred pl ...
- Tokyo Interbank Offered Rate.
Euroyen TIBOR will be terminated in 2024.
JBA TIBOR Reform , JBA TIBOR
/ref>
* TONAR 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 ...
- Tokyo Overnight Average Rate
* SIBOR
SIBOR stands for Singapore Interbank Offered Rate
''Financial Times'' 25 July 2012 and is a daily reference r ...
- Singapore Interbank Offered Rate
* STIBOR Stockholm Interbank Offered Rate (or STIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Swedish wholesale money market (or interbank market). STIBOR is the average (with ...
- Stockholm Interbank Offered Rate
* WIBOR - Warsaw Interbank Offered Rate
* MIBOR - Mumbai Interbank Offered Rate
* PRIBOR - Prague Interbank Offered Rate
* BUBOR - Budapest Interbank Offered Rate
* HIBOR
Hong Kong Inter-bank Offered Rate, (or HIBOR, Chinese: 香港銀行同業拆息), is the annualized rate charged for inter-bank lending on Hong Kong Dollar (HKD) denominated instruments, for a specified period ranging from overnight to one year. ...
- Hong Kong Interbank Offered Rate
* SHIBOR - Shanghai Interbank Offered Rate
* ISDAfix - International Swap Dealers Association Fix
* TELBOR - Tel Aviv Interbank Offered Rate
References
{{Finance-stub
Interest rates
Reference rates