News article Tuesday Dec 28, 2021

Update: LIBOR transition 2021- reference interest rate expired

LIBOR, one of the main interest rate benchmarks used in financial markets, will be phased out by year-end. Lenders, borrowers, and other financial institutions need to prepare for this complex transition from ICE LIBOR to Risk-free rates, which are robust alternatives and already available.

Libor Change

According to estimates, global bank funding transactions amount to about 500 million US dollars per day. This seems small when compared with the 200 trillion US dollars in financial contracts based on the USD LIBOR as the reference interest rate. Typical financial contracts or products include derivatives, bonds, loans, securitizations, and deposits.

The determination of the LIBOR rate by the panel banks on a daily basis was based on quotes. The reliability of these panel bank quotes represents more of an estimate by an expert or money market trader of the panel bank, and is not based on an actual commercial transaction.

 

Who is involved in the transition?

In each case, national financial bodies are developing new concepts assisted by the central bank.

For example, the private banking sector in the US is collaborating with the Federal Reserve in switching LIBOR to the SOFR (Secured Overnight Financing Rate) in order to increase the reliability of US dollar reference rates.
This grouping consists of the Alternative Reference Rates Committee (ARRC), a group of private market participants convened by the Federal Reserve Board and the New York Fed.
In the UK, the banking industry is active in the "Working Group on Sterling Risk-Free Reference Rates" on the transition from LIBOR to SONIA (Sterling Overnight Index Average) in the sterling markets. The Bank of England and the Financial Conduct Authority (FCA) are participating as ex-officio members and providing administrative support to the group.

 

What are the expected effects?

The expected end of LIBOR quotes in 2021 for various maturities may result, among other things, in the following:

  • a need for change for critical benchmarks
  • a possible requirement for fallback projections for reference interest rates with compounding or markups
  • LIBOR fixings for futures and options may be subject to distortions in the spreads of the contracts for the transition
  • historical back-testing with reference interest rate changes will become more complex
  • the source of the fixing in the future will tend to be the national central bank

 

Time horizon

 "The ICE Benchmark Administration (IBA), which oversees LIBOR and its compliance, is conducting a market consultation on the elimination of the 1-week and 2-month maturities for the US dollar LIBOR as of the end of 2021 and the more widely used US dollar LIBOR benchmarks as of the end of June 2023. In the meantime, two consultations have been initiated by the ECB Working Group on Euro Risk-free Rates, inviting stakeholders to comment on default solutions for EURIBOR or possible triggers." (cf. Alternative reference interest rates - preparing for fallback [theice.com])

 

An example of pricing from the dollar area

The designated USD LIBOR successor SOFR is prepared by the New York Fed in cooperation with the Office of Financial Research. The New York Fed publishes the SOFR every business day at approximately 8:00 a.m. Eastern Time.

The SOFR is a much more reliable interest rate than LIBOR because it is determined by its method of creation and the depth and liquidity of its underlying markets. As a secured overnight rate, the SOFR better reflects the way financial institutions finance themselves today.

 

We also provide the respective replacement for the previous LIBOR rates via Infront solutions as follows:

Previous LIBOR rates for the following currencies

Replacement

Maturity

Example O/N symbol

LIBOR CHF

SARON (Swiss Average Rates Overnight)

ON up to 1 year; longer via Gottex Brokers

SAR® ON   SARON.CH

LIBOR USD

SOFR (Secured Overnight Finance Rate) from the Federal Reserve Bank

ON up to 1 year

Secured ON Financing Rate SOFR.FED

LIBOR GBP

SONIA (Sterling Overnight Interbank Average lending rates) of the Bank of England

ON, then from 1st year

Daily SONIA lending rate SONIAGBP.SONIA

LIBOR JPY

TONAR (Tokyo Overnight Average Rate) of the Bank of Japan

Maturity ON up to 1 year

TONAR Final TONAR_FIN.NBJP.FIX

LIBOR EUR

(€STR average rates) of the ECB

ON (up to 1 year)

ESTR

ESTR.EZB

 

Besides of O/N risk free rates by official sources in most currencies developments take place to install forward-looking term rates. Term Rate once recommended offer a roadmap for next steps into definition of reference rates. In Yen, GBP and USD exchanges or facilitators are already appointed to host and publish term rates. Those offer rates for maturities mostly between 1 month and 12 months.

In the Eurozone the Euribor reform transformed the existing benchmark under use of an hybrid calculation methodology into a better fit with current benchmark regulation. At the moment it seems that there is not sufficient liquidity to establish a €STR forward-looking term rate.

SIX as administrator for CHF seems not to plan to install a SARON forward-looking term rate.

The following table shows an overview of all new rates and correspondent sources / administrators:

  Euro Short-Term Rate Daily Sterling overnight index average lending rate Swiss Average Rate ON Secured Overnight Financing Rate Tokyo Overnight Average Rate Final
Administrator / source European Central
Bank
Bank of England - SONIA SIX Federal Reserve System Bank of Japan

Symbol
O/N fix length

ESTREZON_ GBPSONIAON_ CHFSARON_ USDSOFRON_ JPYIBOPROVON_
Symbol O/N ESTR.EZB SONIAGBP.SONIA SARON.CH SOFR.FED TONAR_FIN.NBJP.FIX
Name €STR SONIA SARON SOFR TONAR
LIBOR Alternative
Risk Free Rates
EUR GBP CHF USD JPY
Infront vwd page 2095 1845 1843 1838 1835
Working group European Central Bank Bank of England Swiss National Bank (SNB) - The National Working Group on Swiss Franc Reference Rates Secured Overnight Financing Rate Data - FEDERAL RESERVE BANK of NEW YORK Bank of Japan
Method

backward looking

       
Type

"Unsecured,
overnight"

"Unsecured,
overnight"
"Secured,
overnight"
"Secured,
overnight"

"Unsecured,
overnight"

ON rate

-0,576

0,193 -0,705 0,050

-0,023

Last Updated

28.12.2021

28.12.2021 28.12.2021 28.12.2021

28.12.2021

Trading Date

27.12.2021

22.12.2021 28.12.2021 22.12.2021

24.12.2021

Average rates
1W -0,57669

-

-0,69750 - -
1M -0,57619 - 0,00000 - -
3M -0,57299 - -0,71810 0,04967 -
6M -0,56978 - -0,65000 0,04911 -
9M - - -0,73000 0,04956 -
12M -0,56589 - -0,69000 - -
IBOR / compound / TERM rates
  EURIBOR SONIARATES
GBP TSRR
SARON
Compound Rate
CME Term SOFR
Reference Rates
Quick TORF
Reference Rates

Administrator / source

European Money
Markets Institute (EMMI)
ICE TERM
SONIA
SWX CME QUICK Benchmarks
Inc.(QBS)

Symbol 1M

965993.GMF GBPSONIA.TSRR.1M SAR1MC.CH CME TERM SOFR - tba. TORF - tba.

Symbol 1M fix length

EURIBO01M GBPSONIA01M CHFSARC01M CME TERM SOFR - tba. TORF - tba.

Further information

About Euribor® | The European Money Markets Institute (EMMI) ICE Benchmark Administration | Risk Free Rates Swiss National Bank (SNB) - The National Working Group on Swiss Franc Reference Rates Term SOFR - CME Group Tokio Term Risk Free rate

Snapshot time 27.12. 10:05

EUR GBP CHF USD JPY

Direct agreement for internal use

no no no no yes

Indication - fees by source for
internal use + delay 12/2001

no fees waived 2022 no fees waived 2022 Related Documents | QUICK Benchmarks Inc. (QBS)

Available via Infront Data Manager Treasury

yes January 2022 yes Q1 2022* Q1 2022*

 

1W -0,589 - -0,7037 - -
1M -0,614 0,193 -0,7023 0,05141 -0,035
3M -0,59 0,322 -0,7063 0,07521 -0,03688
6M -0,544 0,4872 -0,714 0,1711 -0,03795
12M -0,495 0,773 -0,7177 0,36035 -

"-" = no rate published
"*" = scheduled

 

We are happy to support you in mapping the new IBOR rates in the data feed and terminal.

Find LIBOR alternative risk free rates in the Infront Professional Terminal here.

 

By Tobias Hartmann, Infront

By Tobias Hartmann

tobias.hartmann@infrontfinance.com