IBOR, which stands for Inter Bank Offered Rate, is the interest rate at which banks lend to and borrow from one another in the interbank market.
What is LIBOR?
LIBOR is the London Interbank Offered Rate. LIBOR is one of a number of IBORs that are widely used in the financial markets, including as a reference rate to a vast number of derivatives, bonds, loans, securitisations, and deposits. Other IBORs include EURIBOR for Euro and USD LIBOR Rate for Dollar transactions.
How is LIBOR Calculated?
LIBOR is calculated and published daily across five currencies (GBP, USD, EUR, JPY and CHF) and seven maturities (overnight, one week, and 1, 2, 3, 6 and 12 months) by the Intercontinental Exchange Benchmark Administrator (ICE BA).
It’s based on submissions by a panel of banks using available transaction data and their expert judgement. LIBOR should provide an indication of the average rate at which each LIBOR contributor can borrow unsecured funds in the London interbank market for a given period, in a given currency. This average is published and used by the financial markets.
Why are IBORs being replaced?
International regulators began focussing on IBOR reform since 2013. With the number of interbank unsecured borrowing transactions reducing in recent years, there has been an increasing reliance on the expert judgement of panel banks on which to base LIBOR.
This has led to concerns that LIBOR is no longer a representative or reliable benchmark reference rate. Between now and the end of 2021, the global financial markets will transition away from using interbank offered rates (IBORs) in financial contracts.
What will replace IBORs?
International regulators are encouraging the development and adoption of “Risk-Free Rates” (RFRs) which are currently proposed to be overnight and term free. Working groups have been established across all major currencies to select alternative overnight rates with four already selected:
1. SONIA (GBP)
2. SOFR (USD)
3. TONAR (JPY)
4. SARON (CHF)
Markets are already beginning to adopt these rates; there has been an increase in the volume of SONIA-referenced swaps in the market as well as recent examples of primary issuance of bonds referencing SONIA or SOFR.
How are we responding?
RBS supports the market transition from LIBOR. We’re working closely with our regulators, market participants, industry bodies and trade associations, to make sure the transition is as smooth as possible. We are waiting for the outcome of the Bank of England’s consultation on a term SONIA to help guide the direction of both existing LIBOR products and the development of new products. This will shape many of our transition plans.