It has been the reference rate for the financial markets for 45 years, but it has also been the symbolic rate of scandals and manipulations in the last 10 years, of that bad face that finance wants to get rid of in order to embark on a new road built on more transparent and transparent foundations. sustainable. From 1 January 2022, Libor is retiring. This is not a direct turning point, but a gradual process that began as early as 2017 which will lead to its total elimination. Therefore, rather than a revolution, one can speak of a resurgence that will lead to a new regime based on a set of risk-free overnight rates, also known as alternative reference rates (ARR).
WHAT IS LIBOR
The London Interbank Offered Rate has for decades been the benchmark for transactions on the interbank market, where banks exchange short-term funds. Other rates applied to banking products are linked to Libor: from current accounts to variable-rate mortgages, through loans, credit cards and derivatives (such as forward rate agreements and IRS, interest rate swaps). If the Libor index rises, the interest rates associated with it also rise and vice versa.
This is a floating rate, calculated daily by the British Bankers' Association and made available at 11.45am London time. The calculation is made on the average of the eight central values provided by sixteen major banks. There are different maturities, from overnight to 12 months, and different currencies.
THE GREAT LIBOR SCANDAL
The scandal erupted in the summer of 2012, making enough noise to overwhelm global finance. The doubt that Libor was being manipulated had been circulating among investors and financial institutions for years, long before the crisis triggered by the bankruptcy of Lehman Brothers made everything and everyone tremble. Confirmation came only during a civil case during which Barclays, the second largest English bank, admitted its guilt and agreed with the British and US authorities to pay a 453 million dollar fine to close the matter. In a very short time, many anomalies came to light and involved the main world banks. The accusations were very heavy: traders and managers, for years, had manipulated the reference rate on a wide range with the aim of making a financial profit. It was also discovered that the manipulations carried out by the banks over the years had not only concerned the Libor, but also the Euribor and the Tokyo Tibor. Several managers were convicted and the banks involved were forced to pay $10 billion in fines.
THE NEW RATES
From 1 January, Libor will switch to a system based on a set of risk-free overnight rates (acronym: Rfr), because they are based on transactions that took place the previous day. The new rates will therefore be decided on the basis of contracts that have already been closed and not on estimates as was the case in the past. What will they be? The Libor in British pounds will be replaced by the SONIA, acronym for Sterling Overnight Index Average, the one in euro will be replaced by the €STR (Euro Short-Term Rate), the Libor in dollars will be replaced by the Sofr, Secured Overnight Financing Rate. Substitutes for Libor have also been found for other currencies, such as the Australian dollar, Japanese yen and Swiss franc.
Libor won't disappear entirely, but it will continue to operate in a "reduced" form for the $230 trillion of existing contracts that use it as a reference for interest payments. In detail, the UK and US authorities will allow the London Interbank Offered Rate in dollars to continue to be used for existing contracts until mid-2023 to allow the majority of "legacy" or outstanding contracts to mature, while the FCA (Financial Conduct Authority) has given the green light to the "synthetic" versions of Libor in yen and pounds for another year.
