The London Interbank Offered Rate (LIBOR) has been the benchmark interest rate in financial markets for more than three decades, but LIBOR has been under pressure since the UK Financial Services Authority (FSA) launched an investigation into the LIBOR manipulation scandal in 2012. After the end of 2021, LIBOR will cease publication.
But the British authorities have no intention of forcing the abolition of LIBOR. After 2021, the Intercontinental Exchange Pricing Administration (ICE Benchmark Administration, referred to as IBA), as the management agency of LIBOR, can still independently publish LIBOR if feasible. However, in the current market environment, once the UK no longer promotes or compels LIBOR quotation banks to provide quotations, LIBOR will be difficult to sustain.
A UK study showed that due to the lack of transaction volume in the unsecured interbank lending and related markets, it is impossible to ensure that LIBOR is based on real transaction data. This is a question about $300 trillion in financial products. However, there is currently no ready-made alternative rate in the market. While the UK authorities are prepared to assist and coordinate the work of market players, market participants must themselves take primary responsibility for developing and transitioning to an alternative reference rate.
In the UK, the Working Group on the Sterling Risk-Free Reference Rate recently recommended the adoption of SONIA (the overnight rate based on the overnight lending rate for unsecured banks being reformed and managed by the Bank of England) as an alternative to sterling LIBOR in the derivatives market.
In the United States, the Alternative Reference Rates Committee (Alternative Reference Rates Committee) has published the U.S. Treasury repo financing rate (that is, an overnight rate based on the overnight lending rate with U.S. government debt as collateral), as a specific derivative denominated in U.S. dollars. A reference rate for commodities and other contracts to replace USD LIBOR.