Libor
[2][3] Libor was phased out at the end of 2021, with market participants encouraged to transition to risk-free interest rates such as SOFR and SARON.
[7][8][9] In July 2023, the International Organization of Securities Commissions (IOSCO) said four unnamed dollar-denominated alternatives to LIBOR, known as "credit-sensitive rates", had "varying degrees of vulnerability" that might appear during times of market stress.
[10] Libor rates were calculated for five currencies and seven borrowing periods, ranging from overnight to one year, and were published each business day by Thomson Reuters.
[13][14][15] The British Bankers' Association said on 25 September 2012 that it would transfer oversight of Libor to UK regulators, as proposed by Financial Services Authority managing director Martin Wheatley's independent review recommendations.
[16] Wheatley's review recommended that banks submitting rates to Libor must base them on actual inter-bank deposit market transactions and keep records of those transactions, that individual banks' Libor submissions be published after three months, and recommended criminal sanctions specifically for manipulation of benchmark interest rates.
[17] Financial institution customers may experience higher and more volatile borrowing and hedging costs after implementation of the recommended reforms.
[22][23] In particular, the Financial Services Act 2012 brought Libor under UK regulatory oversight and created a criminal offence for knowingly or deliberately making false or misleading statements relating to benchmark-setting.
While recognizing that such instruments brought more business and greater depth to the London Inter-bank market, bankers worried that future growth could be inhibited unless a measure of uniformity was introduced.
Libor was defined as: The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.This definition was amplified as follows: The British Bankers' Association published a basic guide to the BBA Libor, which contains a great deal of detail as to its history and its current calculation.
It was an index that measured the cost of funds to large global banks operating in London financial markets or with London-based counterparties.
[45] On Thursday, 29 May 2008, The Wall Street Journal (WSJ) released a controversial study suggesting that banks might have understated borrowing costs they reported for Libor during the 2008 credit crunch.
[48][49] To further bring this case to light, The Wall Street Journal reported in March 2011 that regulators were focusing on Bank of America, Citigroup, and UBS.
In response to the study released by the WSJ, the British Bankers' Association announced that Libor continued to be reliable even in times of financial crisis.
[57] In late September 2012, Barclays was fined £290m because of its attempts to manipulate the Libor, and other banks were under investigation of having acted similarly.
[58][59][60] The British Bankers' Association said on 25 September that it would transfer oversight of LIBOR to UK regulators, as proposed by Wheatley and CEO-designate of the new Financial Conduct Authority.
The review left open the possibility that regulators might compel additional banks to participate in submissions if an insufficient number do voluntarily.
[63] Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an advantage in predicting that day's fixing.
[64] On 27 June 2012, Barclays Bank was fined $200m by the Commodity Futures Trading Commission,[13] $160m by the United States Department of Justice[14] and £59.5m by the Financial Services Authority[15] for attempted manipulation of the Libor and Euribor rates.
[65] The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".
[72] On 6 July, it was announced that the UK Serious Fraud Office had also opened a criminal investigation into the attempted manipulation of interest rates.
[73] On 4 October 2012, Republican US Senators Chuck Grassley and Mark Kirk announced that they were investigating Treasury Secretary Timothy Geithner for complicity with the rate manipulation scandal.
They accused Geithner of knowledge of the rate-fixing, and inaction which contributed to litigation that "threatens to clog our courts with multi-billion dollar class action lawsuits" alleging that the manipulated rates harmed state, municipal, and local governments.
[41] Furthermore, knowingly or deliberately making false or misleading statements in relation to benchmark-setting was made a criminal offence in UK law under the Financial Services Act 2012.
[20][41] From the beginning of July 2013, each individual submission that came in from the banks was embargoed for three months to reduce the motivation to submit a false rate to portray a flattering picture of creditworthiness.
[20][76] A new code of conduct, introduced by a new interim oversight committee, built on this by outlining the systems and controls firms had to have in place around Libor.
[82] Following its cessation, industry publication Financial News noted there were "an army of bankers, lawyers and traders" devoted to working on the transition that would need to change their focus given the switch to a new benchmark, even as there would be other jurisdictions and currencies moving off other inter-bank lending rates in years ahead.
Because of its range of coverage, SOFR is a good representation of the general funding conditions of the overnight Treasury repo market.
It can be used in conjunction with SOFR to form a robust credit-sensitive interest rate benchmark for bank lending and risk management.
AXI and FXI were first conceived by Antje Berndt, Darrell Duffie, and Yichao Zhu,[94][95] and were operationalized by SOFR Academy, Inc.[96] The US-dollar benchmark spreads were launched in 2022[97] and are published each business day by authorized benchmark administrator Invesco Indexing LLC,[98] an independent index provider owned by global asset management firm Invesco.
[100][101] The U.S. Dollar ICE Bank Yield Index is an index proposed by Intercontinental Exchange Benchmark Administration (IBA) in January 2019 to measure the yields at which investors are willing to lend U.S. dollar funds to large, internationally active banks on a wholesale, unsecured basis over one-month, three-month and six-month periods.
