Explainer-The Libor Era Nears Its End
Explainer-The Libor Era Nears Its End
John McCrank and Karen Brettell Tue, December 28, 2021
By John McCrank and Karen Brettell
NEW YORK (Reuters) - Libor, or the London Interbank Offered Rate, will no longer be used for new derivatives and loans as of Jan. 1. The benchmark and reference rate, which had $265 trillion linked to it globally at the start of 2021, is being scrapped in the biggest shake-up to markets since the introduction of the euro in 1999.
WHAT IS LIBOR AND WHY IS IT BEING REPLACED?
Libor, once dubbed the world's most important number, is a rate based on quotes from banks on how much it would cost to borrow short-term funds from one another.
Although it dates to 1969, it was formalized in 1986 and has been used as a reference rate for a vast array of financial products, including student loans, credit cards, corporate loans and mortgages.
Libor was discredited after the 2008 financial crisis when authorities found traders had manipulated it, prompting calls to reform and eventually replace the tarnished rate. Several global banks were fined.
WHAT IS REPLACING LIBOR?
Regulators have said no new business can be done after Dec. 31 using Libor, which has 35 permutations across five currencies, the U.S. dollar, the British pound, the euro, Swiss franc and Japanese yen. Some Libor tenors - the length of time remaining before a contract expires - linked to the U.S. dollar, however, will continue until the end of June 2023 to allow most "legacy" or outstanding contracts to mature.
Libor is being replaced by alternative rates, with a preference toward those recommended by central banks that are based on actual transactions, making them harder to rig. [L1N2TC0XL]
WHAT ARE THE RISKS GOING FORWARD?
To continue reading, please go to the original article here:
https://news.yahoo.com/explainer-libor-era-nears-end-121801897.html