LIBOR

Become a sponsor »

Financial Benchmark Regulation

IOSCO Consultation: Principles for Financial Benchmarks, April 2013

The Effect of Underreporting on LIBOR Rates - Federal Reserve Bank of St. Louis, February 2013

The LIBOR Scandal: Trying to Make Sense So Far, Neal Wolkoff, July 2012

The London Interbank Offered Rate (LIBOR) was the interest rate that banks charged each other to borrow short-term on the London interbank market for more than 50 years. LIBOR was also the broader financial world's benchmark for setting short-term interest rates for products like variable-rate mortgages and corporate loans.

The LIBOR was published for the last time on June 30, 2023, and replaced by the Secured Overnight Financing Rate, or SOFR. SOFR represents the cost of borrowing for a broader variety of market participants than LIBOR and, unlike LIBOR, it is based on actual transactions in overnight lending markets.

Libor was referenced for interest payments on about $350 trillion in notional value of derivative contracts and at least $10 trillion in loans. More recently known as ICE Libor, it was administered by the ICE Benchmark Administration and was based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. The most commonly quoted rate is the three-month U.S. dollar rate.

From its launch in 1986 until 2013, the rate was compiled and published by the British Bankers Association (BBA). However, after authorities found in 2012 that some banks were manipulating it, investor confidence in the accuracy of LIBOR plummeted, leading the UK regulatory panel to strip the BBA of its role in setting LIBOR. In 2013, NYSE Euronext won the contract to administer the benchmark rate. ICE acquired the NYSE Euronext Rate Administration, the name given to the division created to administer the benchmark rate, when it bought NYSE Euronext in 2013. ICE then re-named it the ICE Benchmark Administration.

In response to the Libor concerns, the Financial Stability Oversight Council and Financial Stability Board called for the development of alternative interest rate benchmarks. In 2014, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify best practices for alternative reference rates, and it created a new benchmark, the Secured Overnight Financing Rate (SOFR) as the best rate for use in certain new U.S. dollar derivatives and other financial contracts. It also published its Paced Transition Plan, with specific steps and timelines designed to encourage adoption of the SOFR. SOFR has already been used for a handful of bond offerings by large institutions including the World Bank, MetLife and Fannie Mae. Central banks in Britain, the euro zone, Japan and Switzerland are also constructing new benchmark rates.

Another alternate benchmark, Ameribor, or American Interbank Offered Rate, was created in 2015 by Dr. Richard Sandor and he and his team built an exchange for it called the American Financial Exchange (AFX). Ameribor is a volume-weighted interest rate, calculated daily from the average interest AFX users charge each other for unsecured loans overnight.

Regulators decided to phase out LIBOR as a benchmark by the end of 2021.

The U.K. Financial Conduct Authority's market-led Risk Free Rate Working Group recommended the Sterling Overnight Index Average rate (SONIA) as the preferred risk-free rate (RFR) to replace Sterling LIBOR. The FCA and the Bank of England support the transition to SONIA and alternative rates.

In the U.S., the Alternative Reference Rates Committee (ARRC), a group of private-market participants brought together by the Federal Reserve Board and the New York Federal Reserve are working together to help ensure a successful transition for the U.S. dollar LIBOR to the alternative Secured Overnight Financing Rate (SOFR).

Because of its wide use by a diverse number of banks and financial sectors, the transition from the use of the LIBOR reference rate to an alternative rate is widely viewed as a monumental hurdle, and some market participants have suggested LIBOR may live beyond its December 2021 end date as a "zombie LIBOR" with fewer participating banks.

Former U.S. Commodity Futures Trading Commission Chairman Heath Tarbert stated his support for a LIBOR end-date of December 31, 2021 and for the conversion of U.S. Dollar LIBOR-based swaps to SOFR. In a December 2019 statement, Tarbert also warned against the "zombie LIBOR," stating that the CFTC was considering various proposals "to avoid a potential zombie LIBOR apocalypse" in which LIBOR would exist yet not be representative of a real rate.

Fallbacks for derivatives linked to key interbank offered rates were put into effect on January 25, 2021 in preparation for the eventual phase-out of LIBOR. Published by the International Swaps and Derivatives Association Inc., the fallbacks are to be included in new derivatives contracts that reference ISDA’s standard interest rate derivatives definitions, as well as in legacy non-cleared derivatives if the counterparties bilaterally agreed to include them. Some 12,000 entities, including major banks, have reportedly adopted the new protocol to facilitate negotiations with their trading partners.

On March 5, 2021, the FCA confirmed that LIBOR fixings would no longer be provided by administrators or be representative after December 31, 2021 for most rates -- sterling, euro, Swiss franc and Japanese yen settings, as well as for 1-week and 2-month U.S. dollar settings. The FCA gave an added deadline of June 30, 2023 for remaining U.S. dollar settings. In a related statement, Bank of England Governor Andrew Bailey said, "With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021."

In April 2021, the U.S. House Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets heard testimony from various U.S. banking and financial regulators about the slow progress of the market-led transition away from the use of LIBOR as a key benchmark. In his April 15, 2021 testimony before the subcommitee, Brian Smith, deputy assistant secretary for federal finance at the Treasury, noted that although regulators were phasing out LIBOR, it remained in use by more than $200 trillion outstanding financial contracts. He urged House members to consider legislation to impose more certainly around "a a workable fallback rate" when it expired.

The UK Financial Conduct Authority in April 2023 ordered that some Libor rates continue to be published beyond the original June 30, 2023 deadline to give market participants more time to shift away from LIBOR. The FCA said synthetic versions of the one, three and six-month US dollar Libor rates would continue to be published “for a short period” after the original June 30 cut-off point, before ending for good in September 2024.

Brief background

The Libor benchmark was set up by the British Bankers Association in 1986 as a way of pricing syndicated loans and interest-rate swaps. Libor's rate-setting mechanism involves using a reference panel of bankers, who each submit a rate based on perceived fair value pricing. BBA would then compile the list and publish the LIBOR rate at 11:00 am GMT daily. LIBOR loans are priced in Eurodollars - U.S. dollars in foreign hands - and can mature in as little as 24 hours. It is used as a reference rate for key financial products like interest rate swaps, short-term interest rate futures, credit default swaps and forex rates.

Futures and options contracts on the LIBOR are a key component of the CME Group interest rate products suite, and are especially attractive to fixed interest money managers looking to hedge their short-term interest rate risk. The CME lists 12 consecutive one-month LIBOR futures contracts that trade most actively near the quarterly expiration months of CME Eurodollar futures. More than 1.5 million LIBOR futures contracts trade daily on the CME.

LIBOR manipulation

In February 2012, more than a dozen traders and brokers in London and Asia lost their jobs, were suspended or were put on leave, as a result of a probe into the LIBOR system. The allegations included a year of LIBOR price manipulation by major institutions, including Deutsche Bank, JPMorgan Chase, Royal Bank of Scotland and Citigroup. Inter-dealer broker Icap also suspended one employee and put two on administrative leave following the allegations. U.S. and UK regulators requested information from Icap, as well as two other major inter-dealer brokers, Tullett Prebon and RP Martin, hoping to uncover data regarding information sharing among brokers, hedge funds and banks.

The first fines related to the scandal were assessed in July 2012 to Barclays. The fines, which totaled about $450 million, were issued by the U.K. Financial Services Authority, the Commodity Futures Trading Commission and the U.S. Department of Justice. UBS and the Royal Bank of Scotland (RBS) were also assessed fines in 2012 of $1.5 billion and $600 million, respectively. In January 2013, the International Organization of Securities Commissions (IOSCO) issued a consultation and request for comment on changes to the regulation of financial benchmarks such as LIBOR.

The manipulation scandal dates back to before the financial crisis of 2008 when, leading up to this volatile period, numerous financial institutions were having difficulty obtaining short-term funding. Because LIBOR is set by member banks and involves individual submission of observed rates, rather than based on actual transactions, it was suggested that the daily rate fix is subject to manipulation. In the CFTC's charges against Barclays, the commission found that the bank "routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition."

In 2008, U.S. bankers and investors complained that the LIBOR rate remained higher than it should have been, and charged that the way it is calculated was somehow flawed. The rate spiked again in late April 2008 on news that the BBA was investigating whether banks had, in fact, been deliberately under-reporting the interbank rates they had been paying.

Some observers pointed to the widening spread between LIBOR and the overnight indexed swap (OIS) rate - an indicator of expected central bank interest rates - as evidence that LIBOR is too high. Others said credit fears are not the problem, since banks' credit-default swap (CDS) premiums had been falling. As a result, the Bank of England in April 2008 introduced a Special Liquidity Scheme allowing banks to swap asset-backed securities for 9-month treasury bills to raise liquidity in the LIBOR market.

On September 25, 2013, ICAP was fined a total of $87 million, including a $65 million settlement with the Commodity Futures Trading Commission (CFTC)and a $22 million settlement with Britain’s Financial Conduct Authority as part of an investigation into the LIBOR scandal. The U.S. Justice Department also brought criminal charges against three former ICAP employees over their roles in the manipulation scheme.

On October 29, 2013, Dutch lender Rabobank admitted to criminal wrongdoing in regards to LIBOR manipulation and agreed to pay more than $1 billion in criminal and civil penalties to settle investigations by US, British and other authorities. Piet Moerland, the chairman of Rabobank’s executive board who functions as the chief executive, also resigned immediately in light of the findings in the investigation. The U.S. government later indicted six former Rabobank employees, alleging that they participated in a scheme to manipulate Libor in derivatives tied to the U.S. and yen Libor benchmark rates.

In November 2013, UBS reached an immunity deal with European Union antitrust authorities to spare it from further fines in exchange for cooperating with investigators and turning over information about other banks involved in the rigging.

In August of 2015, Thomas Hayes, formerly with UBS and Citigroup, was convicted of fraudulently trying to rig the Libor, the first criminal conviction of an individual for manipulating the benchmark. He was sentenced to 14 years in jail, but the sentence was later reduced to 11 years.

In January of 2016, a jury acquitted six former brokers accused of conspiring with Hayes to manipulate the benchmark, dealing a major blow to an investigation that had taken more than four years.