Out-Law News 1 min. read
22 Mar 2016, 4:11 pm
The changes are set out in a 'roadmap' document published by Intercontinental Exchange (ICE), and will come into force later this year. They form the first step in a series of "evolutionary reforms" designed to reduce the risk profile of the benchmark rate and make it easier for more banks to participate, which could ultimately remove banks from the calculation process entirely.
"LIBOR is the primary benchmark for short term interest rates globally; it underpins more than US$350 trillion in outstanding contracts and much of the world's financial system," said Finbarr Hutcheson, the president of ICE Benchmark Administration (IBA). "The improvements we have made in the last two years, coupled with this roadmap, are designed to secure LIBOR as one of the world's most trusted, scrutinised and robust financial benchmarks."
IBA, a UK-based subsidiary of NYSE Euronext, took over responsibility for the administration of LIBOR from the British Banking Association (BBA) in February 2014, following a number of high-profile scandals. LIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks, and is widely used internationally as the pricing basis for trillions of dollars worth of financial instruments.
The administrator has developed a 'waterfall' of methodologies, which will enable it to continue to publish the rate when the volume of actual transaction data falls. The rate will also be based on a wider range of transactions in future, including short-term funding from central banks and non-bank financial institutions as well as interbank lending.
IBA will now conduct a 'feasibility study' on the creation of an "appropriate algorithm" which could be used to calculate LIBOR from raw transaction data, provided to IBA by contributing banks. Using an algorithm in this way would further reduce the risks to participators, and so open up the rate-setting process to a wider range of participating banks, IBA said.