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Glossary

LIBOR replacement

Reform of LIBOR – replacement of LIBOR rates with credit risk for the alternative risk-free rates or near risk-free rates: risk-free rate or near risk-free rate.


It is possible to identify three most important reasons for this reform. Firstly, it is impossible to solve the issue of manipulating the values of interbank rates by LIBOR participating banks. Secondly, it is a high degree of LIBOR dependence on expert judgments, rather than on actual transactions (according to the US Federal Reserve, the daily volume of three-month borrowings is USD 500 mln). Finally, the third reason is the impact of LIBOR on financial stability.


The LIBOR alternative was selected by five advisory councils for the five largest world currencies: US dollar, Euro, Yen, Swiss Franc and British Pound.


In 2017 in the US, the Alternative Reference Rates Committee selected SOFR a rate, which will replace USD LIBOR and will be used in all contracts. At the moment, the Committee is developing an action plan for the transition from USD LIBOR to SOFR.


In 2017 in the UK, the Working Group on Sterling Risk Free Reference Rates recommended to use the rate SONIA as a replacement for GBP LIBOR. In 2018, reforms of SONIA were carried out for a more correct and complete calculation and compliance with the best practices of IOSCO.


In 2017 in Switzerland, the National Working Group on Swiss Franc Reference Rates recommended the SARON rate as an alternative to CHF LIBOR. Starting from June 13, 2019, the National Bank focuses only on the new benchmark SARON and sets the boundaries of its fluctuations. Switzerland became the first country where the regulatory authority began to use the new risk-free rate as a tool of its monetary policy.

In 2016, the Working Group on Risk Free Reference Rates of Japan decided that TONA would replace JPY LIBOR, JPY TIBOR, EUROYEN TIBOR.


More recently than in other countries, work has begun to identify and replace risk rates in euros. In 2018, the Working Group on Euro Risk-Free Rate developed the new ESTER rate (€STR) as a new money market rate that will be an alternative to the three rates: EUR LIBOR, EURIBOR, EONIA.


It is impossible to waive LIBOR without creation of the fixed-period instruments, where the underlying asset is a risk-free rate. In this regard, the financial industry is actively developing new instruments and bringing them to the markets. In December 2017, the ICE launched SONIA futures, and in October 2018 – SOFR futures. In May 2018, the SOFR futures were listed on the CME exchange. In October 2018, the CME exchange started trading in SONIA futures. In October 2018, CME became the world’s first platform to start regular clearing of OTC SOFR swaps, with a maximum contract duration of 30 years. The contract terms allow the exchange of fixed payments in lieu of SOFR, as well as payments in USD LIBOR against SOFR and the effective federal funds rate (EFFR) against SOFR. In October 2017, LCH started clearing of interest rate swaps based on SARON. EUREX was the first to launch SARON futures trading in 2018.


It is anticipated that the publication of LIBOR rates may be stopped from 2022. All working groups and market participants are working to ensure that the full transition to alternative rates does not lead to losses on LIBOR instruments.


The first issue of FRN bonds based on a risk-free rate was held by the European Investment Bank in June 2018. This is a 5Y issue at GBP 1 bln, the interest rate depends on SONIA+0.35%. This was followed by the issues from the US government agency Fannie Mae with reference to SOFR in July 2018 (with maturity of 0.5 years, 1 year, 1.5 years). Then new issues in SOFR and SONIA started to appear several times a month.

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