The End of LIBOR
The last panel bank fixing in history for USD LIBOR was set at 11:55 am on Friday, June 30, marking the end of LIBOR – the London Interbank Offered Rate – and representing a fundamental shift in the financial landscape. The industry now has a more reliable, resilient and transparent framework for benchmarks which will restore confidence in the financial system.
James von Moltke, Deutsche Bank’s Chief Financial Officer; President and Chair of the industry Working Group on Euro Risk-Free Rates, said:
“The transition from LIBOR to risk-free rates is a monumental milestone for financial markets. Deutsche Bank is honoured to have contributed to this global reform helping to drive solutions through the public-private working groups, including through the Working Group on Euro Risk-Free Rates in Europe, and proactively engaging with our clients to ensure they were well informed, had robust transition plans as well as access to our RFR-based products and solutions. This was a hugely complex undertaking and on behalf of the Group Management Committee I would like the take the opportunity to thank all of those who contributed to the initiative both internally and externally across the globe.”
The London Interbank Offered Rate (LIBOR) has been the dominant interest rate benchmark in global financial markets since the 1980s. It represented the average interest rate at which major banks in London were prepared to lend to each other and, consequently, it served as a common benchmark for a wide range of contracts with panel bank fixings in USD, EUR, GBP, JPY and CHF.
All EUR, GBP, JPY and CHF LIBOR panels ceased at the end of 2021 as well as the 1-week and 2-month USD LIBOR settings. Given the significant use of USD LIBOR globally, the remaining five panel-based USD LIBOR settings were given an additional 18 months to address legacy exposures.
Whether you are a family business funding your expansion; a university graduate with a long-term loan, an exporter protecting against interest and currency rate fluctuations, or a pension fund planning for the future, LIBOR will have played a key role. At its peak, financial contracts worth approximately 350 trillion US dollars used LIBOR as the key reference rate for various financial products.
However, after the benchmark was revealed to be susceptible to manipulation in the aftermath of the 2008 financial crisis, confidence in the integrity and reliability of the rate setting process plummeted. In July 2014 the Financial Stability Board recommended the development of alternative reference rates and in 2017, the UK Financial Conduct Authority (FCA), the regulatory body overseeing LIBOR, announced that LIBOR would be phased out.
In response, major central banks, regulatory bodies and industry organisations joined forces to develop alternative benchmarks or so-called risk-free rates (RFRs) such as the Secured Overnight Financing Rate (SOFR) in the United States, the Sterling Overnight Index Average (SONIA) in the United Kingdom, and the Euro Short-Term Rate (ESTR) in the Eurozone. These rates are based on actual transaction data derived from, for example, overnight repurchase agreements or overnight unsecured lending.