20 years: Interest rate benchmarks
In the first video of his series, John introduces the IBOR transition process. He begins by explaining how LIBOR emerged, became one of the major focal points for regulators and central banks and was entrenched in all markets for all financial market participants. John briefly explores the two unavoidable issues with LIBOR that have surfaced in the last few years.
In the first video of his series, John introduces the IBOR transition process. He begins by explaining how LIBOR emerged, became one of the major focal points for regulators and central banks and was entrenched in all markets for all financial market participants. John briefly explores the two unavoidable issues with LIBOR that have surfaced in the last few years.
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9 mins 11 secs
LIBOR – the London Interbank Offered Rate - emerged from obscurity to become one of the main focal points for regulators and central banks and was entrenched in all markets for all financial market participants which include global banks, asset owners, retail customers or anyone else with any exposure to financial products.
Key learning objectives:
Understand the background and emergence of LIBOR
Understand the two major problems with LIBOR
Understand RFRs and the differences between the RFRs
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LIBOR was conceived at the end of the nineteen eighties as a basis for measuring the interest to be paid on syndicated loans. The use of LIBOR mushroomed and used in a wide variety of financial products, from basic retail loans such as college loans and mortgages to complex financial derivatives. Due to the complexities of these products and the fact that many are traded over the counter or OTC, no one knows precisely how much money is connected to LIBOR, but estimates vary from 200-500 trillion US dollars.
They bribed the individuals responsible for submitting LIBOR rates to lie about their actual cost of money. As a result, banks and brokers were fined billions of dollars, a lot of people were losing their jobs, and about two dozen people from a variety of different financial institutions were serving jail terms.
As a result of the fiasco, the regulators have taken the opinion that LIBOR is no longer fit for purpose and must be replaced. The deadline for replacing LIBOR is the end of 2021. The Bank of England has advised that market participants should not issue or offer products that reference LIBOR which expire after their end 2021 deadline.
Almost every market has a LIBOR equivalent or near equivalent – EURIBOR in Europe, TIBOR in Tokyo, SIBOR in Singapore, UBIBOR in Ulan Bator and so on. All these are being reformed or replaced. For many markets, the replacements are known as RFRs or “Risk Free Rates”. These vary in details but share certain commonalities:
They are based purely on actual transactions and all of these transactions are in overnight markets.They are not risk free.
RFRs are overnight rates, they typically set significantly below the related IBOR rate, which is typically quoted over a 3 or 6 month period.
This content is also available as part of a premium, accredited video course. Sign up for a 14-day trial to watch for free.