Edited and updated on 12.05.2023
”LIBOR”, once labeled as the world’s most important benchmark was discredited because of the 2008 financial crisis when authorities in the United States and Britain found traders had manipulated it to make a profit that sparked an investigation by Britain’s Financial Services Authority (FSA). The LIBOR rigging scandal of 2008 dragged major banks into trouble and made them compensate billions of dollars in fines and jail sentences for traders convicted of manipulating the benchmark for profit.
What is the alternative?
It is reported that the British bus operator National Express had become the first company to take out a loan from NatWest Bank based on the Sonia benchmark replacing the LIBOR benchmark and thousands of firms from Britain and the
As a universal foolproof alternative to LIBOR is not immediately in sight some countries are adopting their own benchmarks. In Britain, hedge funds and pension insurance clients have started writing and trading derivatives contracts linked to Sterling’s overnight index average (Sonia). The US Launched Secured Overnight Financing Rate (
The substituting of Libor with another reference rate does not appear to be easy as financial regulators worldwide are scared of a situation where any mishandling in operation can cause credit market confusion which may trigger plentiful lawsuits. Though, some countries are adopting their own benchmarks, the lack of forward-looking term rates of them making corporate borrowers uneasy. This is because of concerns among corporate borrowers that the new benchmark will make it harder for them to know how much interest they owe because the rate is backward looking.
For example, the hedge funds and pension insurance clients in Britain have started writing and trading derivatives contracts linked to Sonia, but many banks and borrowers are still dragging their heels in the absence of forward-looking term rates. The trading in derivatives contracts in the US linked to Sofr is steadily progressing with State associated entities and financial institutions, the market is still anticipating a forward-looking term rate. The Estr transition away from Libor is taking place at a sluggish speed in the absence of forward-looking term rates. Though, Saron has effectively swapped the bank-reported Swiss rate TOIS, as well as the three-month Libor rate that the central bank used as a policy tool. However, the replacement of the Swiss franc linked to Libor which is intensely rooted in the Swiss financial system taking place at a sluggish pace. The transition from Lbor to Tonar and Tibor is complicated in Japan because of persistently negative interest rates.
Originally posted: October 11, 2019