London Interbank offered rate (LIBOR) 25/04/2019 – Posted in: Daily News

London Interbank Offered Rate (LIBOR)

For: Mains
Topics covered: LIBOR, Transition, Opportunities, Intercontinental Exchange

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Libor (London interbank offered rate), the benchmark underpinning more than $350 trillion of financial products, will be phased out by the end of 2021, as UK regulators and banks look to replace the scandal-tarred indicator with.

 

LIBOR

LIBOR is a benchmark interest rate at which major global lend to one another in the international interbank market for short-term loans. LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks.

The rate is calculated and published each day by the Intercontinental Exchange (ICE).

LIBOR is the average interest rate at which major global banks borrow from one another. It is based on five currencies including the US dollar, the euro, the British pound, the Japanese yen, and the Swiss franc, and serves seven different maturities—overnight/spot next, one week, and one, two, three, six, and 12 months. The combination of five currencies and seven maturities leads to a total of 35 different LIBOR rates calculated and reported each business day. The most commonly quoted rate is the three-month U.S. dollar rate, usually referred to as the current LIBOR rate.

 

Why the transition from Libor?

The rate isn’t sustainable because of a lack of transactions providing data. Libor became a byword for corruption after traders were caught manipulating the benchmark, leading to about $9 billion in fines and the conviction of several bankers.

The London Interbank Offered Rate (Libor) transition opens up a sizeable business opportunity for large consulting firms such as PwC, KPMG, EY and Deloitte and also for global IT firms, including leading players in India. Regulators globally have asked firms to move away from Libor to other alternate, risk-free rates (RFRs). Derivatives, bonds, mortgages, loans, mutual funds, securities, underwriting, deposits, advances, pension funds and contracts, worth $370 trillion, are currently linked to the scam-hit Libor.

 

Opportunities around the migration include

  • Assessment of current exposure to Libor.
  • Design, development and implementation of new products based on new rates.
  • Creation of new valuation models.
  • Creation of fresh legal documents and policy frameworks.

 

Majority of large banks and trading houses, including Bank of America, Bank of England, Merrill Lynch, JP Morgan Chase, Morgan Stanley and Japanese banks have started working on Libor transition.
However, Indian banks are yet to start any work towards migration as the regulator is yet to make any announcement in this regard.

 

Intercontinental Exchange

Intercontinental Exchange (ICE) is an American company that owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. This includes ICE futures exchanges in the United States, Canada and Europe, the Liffe futures exchanges in Europe, the New York Stock Exchange equity options exchanges and OTC energy, credit and equity markets.

ICE also owns and operates 6 central clearing houses: ICE Clear U.S., ICE Clear Europe, ICE Clear Singapore, ICE Clear Credit, ICE Clear Netherlands and ICE NGX.

 

Source: The Hindu