The global benchmarks replacing Libor
Libor is an interest rate based on quotes from banks on how much it would cost to borrow money from each other. It is a price reference for financial contracts worth more than $300 trillion globally, from complex derivatives to home loans and credit cards.
Attempts by banks to rig the 50-year old benchmark denominated in sterling, yen, Swiss franc, dollar and euro, prompted regulators to call time on it. Widespread use of Libor is meant to end by December 2021 in Britain and the United States.
Here is a list of some of the alternative benchmarks designed to replace it:
Name: Secured Overnight Financing Rate (Sofr)
Progress: Launched in mid-2018, trading in derivatives such as futures and swaps has grown steadily and more than $236 billion notional in cash instruments has been issued. A Federal Reserve-convened industry group has set up fallback language for the problem of contracts linked to expiring Libor.
Problems: Issuance of Sofr notes is mainly by state-linked entities, and financial institutions. The market is still awaiting a forward-looking term rate, as opposed to one fixed overnight such as Sofr.
Name: Euro short-term rate (Estr)
Progress: The European Central Bank started publishing Estr on Oct. 2, replacing Eonia which like Libor was based on quotes from banks and which will disappear at the end of 2021. Belgian regulators in July approved the reform of the separate Euribor benchmark for longer-term contracts.
Problems: Europe is lagging the United States and Britain in transition due to slow progress in agreeing the details of the new benchmarks. The lack of forward-looking term rates could limit corporate borrowing.
Name: Sterling overnight index average (Sonia)
Progress: The reformed Sonia was launched in April 2018 as a Libor replacement, and banks have begun selling Sonia-linked bonds and loans. Volumes of Sonia swaps trading have grown steadily to become nearly half the market.
Problems: There is no firm deadline for Libor to be discontinued, meaning many banks and borrowers are dragging their heels. As in other markets, there is also a lack of a forward-looking term rate, making corporate borrowers uneasy.
Name: Swiss average rate overnight (Saron)
Progress: Saron has successfully replaced the bank-reported Swiss rate TOIS, as well as the three-month Libor rate that the central bank used as a policy tool.
Problems: Work still continues on replacing Swiss franc-denominated Libor, deeply embedded in the Swiss financial system.
Name: Tokyo overnight average rate (Tonar)
Progress: The bank of Japan has identified Tonar, in existence since 2016, as the preferred rate alongside a reformed version of Tibor.
Problems: Persistent negative interest rates in Japan make it hard to develop forward-looking rates. Co-existence of Tonar and the reformed Tibor complicate matters.
Sources: Capco, Oliver Wyman, U.S. Federal Reserve
Source: Reuters (Reporting By Lawrence White. Editing by Jane Merriman)