The London Interbank Offered Rate (LIBOR) has long been one of the most important benchmark rates in the financial world, but its full discontinuation is around the corner. LIBOR has been discontinued in all its currencies and terms as of December 31, 2021, except for references in US dollars for one-day, three-, six- and twelve-month terms, which will be published until June 30, 2023. The decision to discontinue LIBOR was made due to concerns about its integrity and reliability.
Prior to its discontinuation, LIBOR relied on a daily survey by a panel of banks reporting the rates at which they believed they could borrow funds from other banks in the interbank market. However, after a series of financial scandals, it was discovered that some banks had manipulated LIBOR to profit in their financial operations. This raised questions about the integrity of the rate and prompted regulators to consider alternatives.
Consequently, several alternative reference rates have been created, such as the Secured Overnight Financing Rate (SOFR)[1] and the Sterling Overnight Index Average (SONIA) in the UK. These benchmark rates are based on actual transactions rather than bank surveys, making them more reliable and less susceptible to manipulation.
The discontinuation of LIBOR has brought uncertainty to creditors and debtors who have used this benchmark rate for credit agreements. The Alternative Reference Rate Committee (ARRC) of the New York Federal Reserve is the committee charged with ensuring that the transition from USD LIBOR is successful. The ARRC has made efforts aimed at adopting more reliable reference rates to replace USD LIBOR.
