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London interbank offered rate (Libor)
Libor is a floating interest rate benchmark that tracks the cost of unsecured borrowing for large banks across five currencies and seven maturities, from overnight to 12 months. It is used as a reference rate for derivatives, loans and securitisations.
Confidence in Libor was hit during the financial crisis, when banks attempted to manipulate the benchmark to make money on interest rate swap positions, or to conceal increased funding costs. The resulting scandal prompted a review by the Financial Stability Board (FSB), and an ambitious reform programme.
In 2013, Libor submissions and administration became regulated activities, overseen by the UK’s Financial Conduct Authority (FCA), based on the recommendations of the Wheatley Review, which was published the previous year.
Ice Benchmark Administration, which assumed responsibility for calculating Libor in 2014, also reformed its submission and calculation methodologies in an effort to restore confidence in the benchmark.
Libor is still widely used to set interest rates for loans and derivatives. In 2018, a working group convened by the Federal Reserve Bank of New York estimated that around $200 trillion of financial products are based on US dollar Libor, with derivatives accounting for nearly 95% of this activity.
However, regulators in a number of countries have already selected alternative reference rates to replace Libor in derivatives contracts, such as the Secured Overnight Financing Rate (SOFR) in the US and the Swiss average rate overnight (Saron).
In 2017, FCA chief executive officer Andrew Bailey revealed the regulator had agreed existing Libor contributors could abandon the process after 2021, adding urgency to the reform attempts kicked off by the FSB.
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