London Interbank Offered Rate (LIBOR) is the weighted average offer rate for various debt instruments of the world's leading banks. For the first time the LIBOR rate was applied in 1986 and for more than 30 years it has been the benchmark for government and corporate bonds, currency and interest rate swaps, various loans and long-term deposits, futures contracts and many other financial instruments.
LIBOR is calculated for five currencies: US dollar, Sterling, Yen, Euro and Swiss Franc. An indicative interest rate is calculated for each currency and for a variety of periods: overnight, one week, one month, two months, three months, six months and a year. Thus, 35 LIBOR rates are published every business day in London.
Due to the multiple facts of LIBOR usage manipulations in particular because of lack of regulation and imperfections in calculation methods, international regulators led by the Financial Stability Board of the G20, initiated an Interest Rate Benchmark Reform.
Alternative Rate Benchmarks
New risk-free indicators will be used as replacements for the LIBOR rates for each market/currency (see the table below).
Currency |
Name of the rate |
Administrator |
| US Dollars |
SOFR (Secured Overnight Financing Rate) |
Federal Reserve Bank
of New York |
| Sterling |
SONIA (Sterling Overnight Index Average) |
Bank of England |
| Yen |
TONAR (Tokyo Overnight Average Rate) |
Bank of Japan |
| Euro |
€STR (Euro Short-Term Rate) |
European Central Bank |
| Swiss Franc |
SARON (Swiss Average Rate Overnight) |
SIX Group |
The new indicators for alternative rate benchmarks are based on the transactions, which exclude the options of manipulation, and are risk-free – it does not contain remuneration for credit risk associated with banks. Credit risk is avoided in two ways: the first one is the calculation of indices for transactions with a maturity of one day and the second one is the use of repo transactions secured by government bonds. The transition to SOFR, SONIA, TONAR, € STR, SARON is a major reform that will affect any company that uses LIBOR financial instruments.
Terms of LIBOR cessation
The final termination of the LIBOR rate benchmark application is expected in 2023.
In particular, the UK Financial Conduct Authority (FCA) announced its intention to stop collecting data from banks for calculating LIBOR rates after the end of 2021.
On March 5, 2021, FCA published an
announcement on future cessation and loss of representativeness of LIBOR benchmarks. The announcement states the timing for the cessation or loss of representativeness of all 35 LIBOR settings at once, giving firms a clear set of deadlines across all currencies and tenors.
- Publication of all 7 euro LIBOR settings, all 7 Swiss franc LIBOR settings, the Spot Next, 1-week, 2-month and 12-month Japanese yen LIBOR settings, the overnight, 1-week, 2-month and 12-month sterling LIBOR settings, and the 1-week and 2-month US dollar LIBOR settings will cease immediately after 31 December 2021.
- Publication of the overnight and 12-month US dollar LIBOR settings will cease immediately after 30 June 2023.
- Immediately after 31 December 2021, the 1-month, 3-month and 6-month Japanese yen LIBOR settings and the 1-month, 3-month and 6-month sterling LIBOR settings will no longer be representative and representativeness will not be restored.
- Immediately after 30 June 2023, the 1-month, 3-month and 6-month US dollar LIBOR settings will no longer be representative and representativeness will not be restored.
FCA will continue to publish remaining LIBOR settings for a further period on a changed methodology (also known as a ‘synthetic’) intended to protect consumers and market integrity by reducing disruption in markets, where the feasibility of the conversion of LIBOR benchmarks to alternative rates in certain outstanding contracts will be doubtful.
Recommendations
The reform of LIBOR rate will unambiguously affect the activity of private companies, in particular:
(1) interest rate hedging of floating rate loan agreements with reference to LIBOR;
(2) loan agreements and intercompany loans that include a LIBOR clause;
(3) financial and valuation models that use LIBOR as a component of the discount rate.
To prepare for the cessation of the LIBOR rate and the application of new rate benchmarks, companies should carefully analyse existing accounting practices and predict an appropriate response strategy that will cover active contracts, business processes and internal controls. In particular, it is recommended to develop and conclude additional agreements based on the conditions for the transition to new indicators.
In case of any additional questions related to the reform of the world LIBOR indicator, our specialists are always ready to provide help and assistance.
