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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.

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	Tokyo 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