What is LIBOR?

London Interbank Offered Rate (LIBOR) has been utilized by financial institutions as a reference point for establishing interest rates on a variety of debt instruments. It has become one of the most commonly used tools determining short-term interest rates globally.

LIBOR is an average rate which large banks in London use to borrow unsecured short-term loans from other banks. LIBOR is offered in five different currencies and seven different time frames for maturity. It is issued by the ICE Benchmark Association.

 

Background:

Financial institutions will be transitioning away from LIBOR by the end of 2021. This “end of LIBOR” date was stated by the FCA’s CEO in 2017 and it seems international financial firms and regulators are very much on board with this phase out, especially because of distrust of LIBOR post-scandal. Additionally, LIBOR may no longer be provided or become too risky to be relied upon by the end of 2021.  UK entities are leading the charge away from LIBOR. The FCA has instructed UK banks and insurance companies to submit transition plans by December 25, 2018.

 

The Players:

  • The Financial Conduct Authority (FCA) – UK regulatory body responsible for LIBOR oversight, recommended the expiration date for LIBOR as the end of 2021
  • ICE Benchmark Administration (IBA) – Administers and publishes LIBOR
  • The Federal Reserve – Power to assign responsibility to the ARRC
  • Alternative Reference Rate Committee (ARRC) – Tasked by the Fed, responsible for the transition from US Dollar LIBOR to a new benchmark replacement rate
  • The International Swaps and Derivatives Association (ISDA) – International trade organization governing OTC derivatives, provided reports regarding derivative contracts and LIBOR

 

The Deadlines:

  • Submission of transition plans by UK banks & insurance companies – December 25, 2018
  • Expiration of LIBOR – December 31, 2021

 

What do we do now?

There is a transition from LIBOR to other benchmarks, called “Risk-Free Rates” (RFR), which differ by each currency currently using LIBOR (USD, GBP, CHF, JPY, EUR). In the U.S., we would transfer to SOFR. The U.K. will transfer to SONIA.  Switzerland will transfer to SARON. Japan will transfer to TONA. The European Union will transfer to ESTER (available as of October 2019).

Check back in January for our blog post detailing action steps for your LIBOR transition.

In the meantime, 8of9 would be happy to provide expertise to support your LIBOR transition. Email Christine.Min@8of9.nyc to set up a conversation!