US regulators urge financial firms to quickly ditch Libor rate benchmarks

US regulators urge financial firms to quickly ditch Libor rate benchmarks

Subject : Economics

Context : US financial regulators urged market participants on Friday to accelerate their efforts to detach financial products from Libor interest rate benchmarks, while casting doubt on new benchmarks built to compete with their preferred replacement.

Concept :

LIBOR

• LIBOR is a benchmark interest rate at which major global lend to one another in the international interbank market for short-term loans.
• LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks.
• The rate is calculated and published each day by the Intercontinental Exchange (ICE).
• LIBOR is the average interest rate at which major global banks borrow from one another.
• It is based on five currencies including the US dollar, the euro, the British pound, the Japanese yen, and the Swiss franc, and serves seven different maturities—overnight/spot next, one week, and one, two, three, six, and 12 months.
• The combination of five currencies and seven maturities leads to a total of 35 different LIBOR rates calculated and reported each business day.
• The most commonly quoted rate is the three-month U.S. dollar rate, usually referred to as the current LIBOR rate.

Why the transition from Libor?

• The rate isn’t sustainable because of a lack of transactions providing data. Libor became a byword for corruption after traders were caught manipulating the benchmark, leading to about $9 billion in fines and the conviction of several bankers.
• The London Interbank Offered Rate (Libor) transition opens up a sizeable business opportunity for large consulting firms such as PwC, KPMG, EY and Deloitte and also for global IT firms, including leading players in India.
• Regulators globally have asked firms to move away from Libor to other alternate, risk-free rates (RFRs)