The London Inter-Bank Offered Rate (LIBOR) is used world-wide by financial institutions as an agreed key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated and published each day by the Intercontinental Exchange (ICE), using data provided by each participating bank. LIBOR is used as the basis for

  • Interest rate swaps and futures, options, and other derivatives
  • Forward rate agreements (FRA), Short term lending between banks
  • Consumer loans, including floating rate mortgages and deposits
  • Hybrid derivatives, for example, collateralized debt and mortgage obligations (CDO / CMO)

Problems with the validity of contributed data raised questions about the benchmark that have led to it being phased out. The Federal Reserve and UK regulators have said that LIBOR will be phased out by the end of June 2023. It will be replaced by the Secured Overnight Financing Rate (SOFR).

LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 2021.

As well as banks’ lending to other banks, LIBOR is the basis for consumer loans and credit products such as credit cards, car loans, and some mortgages.

LIBOR is dead, long live SOFR

The Secured Overnight Financing Rate (SOFR) is calculated based on observed transactions in the U.S. Treasury market, and is already used as a benchmark interest rate for USD loans and derivatives. SOFR is based on actual data from higher volumes of trades than LIBOR making it theoretically more difficult to manipulate, and a better indicator of reality.

What is the impact?

The change from LIBOR to SOFR is fundamental and for many pre-existing contracts the way forward will be business negotiation and commercial agreements.

Technology does have a part to play. Projects to understand the risk and exposure to change must tightly control the status of long-term administration (changes, negotiations, and termination of loans) across a moving situation; the business as usual expiry of agreements, creation of new agreements.

During this transition inter-system and inter-bank connectivity must support both rates and movements of data that performed transformations must understand the new rules.

How can Responsiv help?

Responsiv provide accelerated project delivery for banks and financial institutions faced with regulatory deadlines. We take the problem away by developing and documenting a solution and then briefing your team to allow you to maintain the solution, or provision the Solution-as-a-Service (SaaS).

Our team are experienced with working to tight deadlines, have no other “day job” to distract them, and understand how to develop to a standard.

If your organisation needs to accelerate or refocus projects or would appreciate a different perspective – then don’t hesitate to contact us

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    Richard Whyte

    Richard Whyte

    Richard Whyte has been building enterprise IT solutions for over 20 years. He is known for creating innovative practical solutions that provide a strong foundation for future development, whilst solving immediate problems. Previously the European CTO and Principal Architect for IBM Systems Middleware at IBM, he has an MBA, a degree in Statistics and Computing, is a Chartered Engineer, a Chartered IT Professional, and Fellow of both the Institute of Technology and the British Computer Society.