Transition from LIBOR to alternative reference rates

Benchmark interest rates remain today as a core component of global financial markets. In mid-2017, the UK Financial Conduct authority made an announcement regarding the London Interbank Offer Rate (LIBOR), stating that this benchmark reference rate would stop being considered as the main interest reference rate after the end of this year 2021.

What is exactly the LIBOR ?

“The London Interbank Offered Rate (LIBOR) is a measure of the average rate at which banks are willing to borrow wholesale unsecured funds. Administered by the ICE Benchmark Administration, the LIBOR is calculated as a trimmed mean of submissions from selected panel banks. It is published in five currencies (USD, GBP, EUR, CHF, JPY) and a range of tenors (ON/SN, 1W, 1M, 2M, 3M, 6M, 12M). LIBOR is the most widely used interest rate benchmark and serves as a price reference for a broad range of financial instruments, such as loans, bonds, and derivatives. The volume of outstanding financial contracts that references LIBOR is estimated at approximately USD 300 tn globally with around USD 6.5 tn in CHF LIBOR (FSB, 2014)”. National Working Group on Swiss Franc Reference Rates, ©2019

Used as a benchmark reference rate to fix interest rates on negotiated contracts since the mid-1980s, the future of LIBOR is highly uncertain.

As announced by the UK Financial Conduct Authority, in less than two years support for LIBOR will be removed, and banks will have to switch contracts, products, systems and processes based on this rate to Alternative Reference Rates (called ARR).

The alternative reference rates differ from one currency to another:

  • For Switzerland, the alternative recommended reference rate by the “National Working Group on CHF Reference Rates” is the SARON (Swiss Average Rate Overnight), a reference rate published daily by the SIX swiss exchange.

  • For USA (USD), the SOFR (Secured Over-night Financing Rate).

  • For UK (GBP), the SONIA (Sterling Over-night Interbank Average rate).

  • For Europe (EUR), the ESTR (Euro Short Term Rate), or EURIBOR.

  • For Japan (JPY), the TONA (Tokyo Over-night Average rate), or TIBOR

To be ready to support these changes, market and business leaders must take actions. (...)

Whitepaper_Tansition from LIBOR to ARR_New Access_05_2021
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