The London Interbank Offered Rate (LIBOR) is a daily report that displays the interest rates that major banks charge each other for short-term loans. It serves as a benchmark for numerous financial contracts and investments, with rates calculated for varying time frames, up to a year. LIBOR holds significance as it impacts the expense of borrowing funds for both individuals and businesses.
The London Interbank Offered Rate (LIBOR) is a daily compilation of interest rates charged by major international banks for large-volume, short-term Eurodollar loans. These rates are calculated up to one year and serve as the base interest rates for derivative contracts in non-euro currencies. For instance, if a US bank wants to offer a loan in Japanese yen, they may use the LIBOR rate as a reference for determining the loan’s interest rate. The LIBOR rate is also utilised in pricing various financial products like adjustable-rate mortgages and credit cards. A panel of banks reports their borrowing costs to the British Bankers Association, which then averages the rates to determine the daily LIBOR rate.
LIBOR is the benchmark interest rate at which major global banks lend to one another in the London interbank market. It is used as a reference rate for various financial instruments, including loans, derivatives, and mortgages.
LIBOR is crucial because it serves as a key benchmark for determining interest rates on a wide range of financial products. It influences the cost of borrowing for individuals, businesses, and governments worldwide.
LIBOR is not directly regulated by any specific authority. However, the Financial Conduct Authority (FCA) in the UK oversees the administration and governance of LIBOR to ensure its integrity and prevent manipulation.
Yes, LIBOR is set to be phased out by the end of 2021. The decision to discontinue LIBOR was made due to concerns about its susceptibility to manipulation and the decline in interbank lending activity.
Various alternative reference rates are being developed to replace LIBOR, depending on the currency. For example, in the UK, the Sterling Overnight Index Average (SONIA) is being widely adopted as the replacement for LIBOR.
The transition from LIBOR to alternative rates may require amendments to existing contracts that reference LIBOR. Parties involved will need to negotiate and agree upon the replacement rate and any necessary adjustments to ensure a smooth transition.
It is generally advised to avoid entering into new contracts referencing LIBOR, as it will be phased out soon. It is recommended to use alternative reference rates that are more sustainable and reliable.
The LIBOR transition may have legal implications, particularly for contracts that do not have clear fallback provisions or mechanisms for transitioning to alternative rates. Parties may need to seek legal advice to address any potential disputes or uncertainties.
To ensure compliance with the LIBOR transition, it is important to stay updated on the latest developments and guidance provided by regulatory authorities. Engaging legal and financial professionals can also help navigate the transition effectively.
Financial institutions should assess their exposure to LIBOR and develop a comprehensive transition plan. This may involve identifying contracts and products linked to LIBOR, communicating with clients, and implementing systems and processes to adopt alternative rates smoothly.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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