Global Reference Rate Transition

Global Reference Rate Transition

Global Reference Rate Transition

Author: Jamile Dunn, Liqueo Senior Consultant


On December 31st, 2021, the Intercontinental Exchange (ICE) Benchmark Administration (IBA) will stop publishing the long-used global debt benchmark LIBOR (London Interbank Offered Rate). This represents an underappreciated yet seismic shift in the global debt markets - as LIBOR has been relied on for over 40 years and currently represents over $200 Trillion in securities and financial contracts. LIBOR has been a key benchmark for setting interest rates for adjustable-rate loans, corporate debt, mortgages, and other forms of debt. Essentially, if a person or institution has issued debt in the last 40 years, they have very likely used LIBOR, whether they were aware of it or not.

However, despite the strategic importance of this crucial measure for the global financial industry, LIBOR has been burdened by scandals and crises that prompted authorities and industry experts to search for a more transparent market-based benchmark.



Currently LIBOR is set daily, by gathering estimates from 18 global banks on the interest rates they would pay to borrow money from another bank in the interbank lending market in London. To prevent extremes, ICE Benchmark Association (IBA) excludes the four highest and four lowest estimates, prior to calculating the average in five currencies (U.S. Dollar, Euro, Pound Sterling, Swiss Franc, and Japanese Yen). One of the major problems with LIBOR is that it isn’t calculated based on what banks actually pay to borrow funds from one another. Rather LIBOR is based on what banks think or estimate they would pay. This leaves LIBOR vulnerable to manipulation because it remains possible for banks to submit lower rates and manipulate LIBOR quite easily. 

This exact type of manipulation was uncovered during the 2012 LIBOR scandal. An investigation revealed a widespread scheme amongst multiple institutions to manipulate LIBOR rates, lowering them to essentially make certain institutions look stronger, as a lower rate indicates a smaller risk of default. This also allowed the parties involved to front-run certain trades, resulting in billions in ill-gotten gains.

This malicious activity prompted global financial authorities to create a new benchmark rate - based on broad market activities and actual transactions, therefore, harder if not impossible to manipulate. After years of deliberation, it was decided to move forward with “Risk Free Rates”. 


There are several forms of RFR, dependent on the currency denomination of the debt. The most prominent of these rates is called SOFR (Secured Overnight Financing Rate) which is the rate for dollar denominated debt. As most debt is denominated in U.S. dollars, SOFR is expected to be the most widely used of the new benchmark rates. But there are also corresponding sister rates for debt denominated in other currencies including: ESTR (Euro Short-Term Rate), SONIA (Sterling Overnight Index Average), SARON (Swiss Average Rate Overnight), and TONAR (Tokyo Overnight Average Rate). 

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Unlike LIBOR which is an estimate, SOFR and its sister rates are transaction-based rates. The transaction volumes which underlie SOFR typically are around $1 Trillion daily, giving central banks and other financial authorities confidence that SOFR will be reliable, even through a varied range of market conditions. This also greatly increases transparency in the market, as the transactions underlying these rates are typically available for reference among market participants - in contrast to the subjectivity of the LIBOR rate setting process.

What’s going to happen?

While these new, more transparent, reference rates are a very positive development for global markets, they also necessitate a massive transition away from the legacy LIBOR rates for nearly all financial institutions. ICE Benchmark Association, which maintains and publishes LIBOR, will begin the phase out process for LIBOR on December 31st, 2021 - and will stop requiring banks to submit the data that generates LIBOR by 2023. 

With trillions of dollars globally benchmarked to LIBOR, financial institutions are being forced to quickly transition to a new reference rate regime. Many need help identifying and implementing the necessary tools to complete this transition. In partnership with our clients, Liqueo has helped over 60 large global financial institutions and asset managers prepare for this transition, to ensure their organisations are ready for this new reference rate paradigm moving into the future. Is your organisation ready? 

Here at Liqueo, we provide organisations with the skills to implement programmes successfully through our flexible workforce model, tailoring solutions for our clients’ strategic goals. We deliver an exceptional, bespoke service to every client via a dynamic and agile framework. If you are interested in how we can help you implement successful programmes or want more information about the Global Reference Transition, contact us.


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