LIBOR Transition FAQs
1.
What is LIBOR?
LIBOR, the London Interbank Offered Rate, was a popular benchmark index rate worldwide. Banks used LIBOR to determine interest payments for financial products like commercial loans and derivative products. LIBOR was the most commonly used global benchmark for short-term interest rates, and was previously referenced in approximately $200 trillion of financial contracts and securities.
2.
Why did the financial industry move away from LIBOR?
There were concerns about the validity and transparency of LIBOR. The rate was calculated on a limited number of market transactions, making it based more on the judgment of a panel of banks rather than on data.
Additionally, the ICE Benchmark Administration (IBA) took steps to phase out LIBOR. In December 2021 they stopped publishing non-USD LIBOR rates and the 1-week and 2-month tenors of USD LIBOR, and after June 2023 banks weren’t required to submit information used to calculate USD LIBOR rates. For these reasons, the financial industry sought a LIBOR alternative.
3.
What is SOFR?
SOFR is the Secured Overnight Financing Rate. Whereas LIBOR was more dependent on expert judgment of panel banks, SOFR is based on data from observable transactions in the marketplace. For more key facts about LIBOR vs. SOFR, please see our comparison chart above.
4.
Did this transition only happen in the U.S.?
This transition happened worldwide. Outside the U.S., several other markets also transitioned away from their relevant currency IBOR to an overnight, risk-free rate. The countries below transitioned to the referenced alternatives:
- United Kingdom – Sterling Over Night Indexed Average (SONIA)
- European Union – Euro Short-Term Rate (ESTR)
- Japan – Tokyo Overnight Average Rate (TONAR)
- Switzerland – Swiss Average Rate Overnight (SARON)
- Canada – Canadian Overnight Repo Rate Average (CDOR transition to CORRA occurring by YE 2024)
