The IBOR Transition – A Reference Rates Reform

The IBOR transition is a global reform with significant impact on the financial industry. Current expectations are that some IBORs will be replaced by new alternative reference rates (ARRs), while others may continue to exist but with a reformed methodology.

For various reasons, the interbank market has become less liquid since the financial crisis, especially in tenors longer than overnight. The rates are therefore no longer considered representative of an actual interbank market, and therefore global regulators are replacing certain IBORs with a new set of benchmark rates, also known as ARRs.

More specifically, concerns about LIBOR first became known well over a decade ago. LIBOR panel bank submissions were manipulated, which highlighted the secular decline in its underlying market. This triggered reform efforts worldwide, and global regulators and industry bodies like the ARRC, FSB, IOSCO, LMA, ISDA, FCA and many more have worked to coordinate these efforts. The purpose has been to address the unique needs of financial markets across countries and currencies, e.g. securing robust benchmark rates based on deep, liquid markets.

There are many attributes that can help make a reference rate robust, but to name a few it should:

  • Have a reliable administrator with strong and resilient production and oversight processes
  • Be clear what market the rate represents and how it measures that market
  • Be based on transactions at a market that has high volumes and diversity, securing it can withstand times of stress and being resilient as markets evolve, ensuring it cannot be easily manipulated

When assessed against this last attribute, it is quite clear why LIBOR is inadequate. In particular, over the four decades since LIBOR was formally developed, the wholesale funding market that it seeks to measure has withered. The Global Financial Crisis of 2007-2009 accelerated the decline of LIBOR’s underlying market, as banks found more stable ways to fund themselves. With so much economic value riding on a thin market, the incentive to manipulate LIBOR increased and such exploitation ultimately became a reality.

Even though extensive reforms have been undertaken to make LIBOR more robust, its production primarily relies on expert judgement rather than eligible funding transactions. The U.K.’s FCA, which regulates LIBOR, has noted that panel banks are not fully comfortable providing submissions. So despite the sprawling use of LIBOR today, the FCA in March 2021 has announced the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. This is an important step towards the end of LIBOR, market participants are urged to continue to take the necessary action to ensure they are ready for transition from LIBOR to the Fallback Rates.

All LIBOR settings will either cease to be provided by any administrator or no longer be representative:

  • immediately after 31 December 2021, in the case of all GBP, EUR, CHF and JPY, and the 1-week and 2-month USD settings; and
  • immediately after 30 June 2023, in the case of the remaining USD settings.

The FCA statement represented an index cessation event under the IBOR Fallbacks Supplement and protocol, triggering a fixing of the fallback spread adjustment at the point of the announcement. This spread adjustment is an important part of the overall fallback rate, and reflects a portion of the structural differences between interbank offered rates (IBORs) and the ARRs used as a basis for the fallbacks – IBORs incorporate a credit risk premium and term liquidity risk, while RFRs are risk free or nearly risk free. The Fallback Rate for each IBOR setting will be based on the relevant RFR compounded in arrears to address differences in tenor, plus a spread adjustment to account for the credit risk premium and other factors, calculated using a historical median approach over a five-year lookback period from the date of an announcement on cessation or non-representativeness. While the LIBOR spread adjustments were fixed at the point of the FCA announcement (05/03/2021), the fallbacks will apply when each LIBOR setting ceases or becomes non-representative – so, after December 31, 2021 for outstanding products that continue to reference all EUR, GBP, CHF and JPY LIBOR settings (with tenor nuances in USD LIBOR mentioned above).

Now the deadlines and spread adjustments for the fallback rates are fixed, firms can push forward with their transition initiatives. With only months to go until 24 LIBOR rates completely cease and another six become non-representative, there’s not much time left.


IBOR Transition Overview


Jurisdiction Currency IBOR Expected Cessation Date ARR Go-live Date Transition Committee


GBP LIBOR 31.12.2021 SONIA 23.4.2019 Sterling Working Group on Risk-Free Rates
US USD LIBOR 30.6.2023 SOFR 3.4.2017 Alternative Reference Rates Committee (ARRC)
Switzerland CHF LIBOR 31.12.2021 SARON XX.12.2017 The National Working Group on Swiss Franc Reference Rates
Japan JPY LIBOR 31.12.2021 TONAR   Cross-Industry committee on Japanese Yen Interest Rate Benchmarks
Europe EUR LIBOR 31.12.2021 €STR 2.10.2019 ECB Working Group on Euro Risk-Free Rates

European Money Markets Institute (EMMI) and Euro RFR Working Group
Europe EUR EONIA 3.1.2022 €STR 2.10.2019
Europe EUR EURIBOR Remains €STR 2.10.2019
Sweden SEK STIBOR Remains SWESTR Mid 2021 The Working Group for Alternative Interest Rates (AGAR)
Denmark DKK CIBOR Remains DESTR 2022 The Working Group for a new Danish Kroner Risk-Free Reference Rate
Norway NOK NIBOR Remains NOWA XX.1.2020 Working Group on Alternative Reference Rates in Norwegian Kroner


Alternative Reference Rates

ARRs are benchmark rates that are being developed as an alternative to IBORs. The ARRs have been identified by various authorities and industry working groups as recommended alternatives or fallbacks for IBORs and/or in some cases it is being considered how an existing benchmark rate can be reformed in accordance with applicable regulation. For each existing IBOR and the identified ARR, the proposals of transition are at different stages and will continue to evolve. Hence, the transition is expected to happen gradually and at varying times across IBORs/ARRs (as outlined in the IBOR Transition Expectations Overview above).

One of the main differences between IBORs and ARRs is in terms of the calculations method, and ARRs can therefore not be considered as like-for-like replacements. IBORs are calculated at (or prior to) the commencement of the interest period they are relating to by submission of panel banks or expert judgement, which allows clients to be certain on the amounts that will be due at the end of the interest period. ARRs are – in contrast – calculated on the last day of the related interest period and will entirely be based on transaction data in the market in the corresponding period. In a nutshell it means the market is moving from a forward-looking calculation method based on panel bank submissions towards a backward-looking calculation method based on transaction data.

Taking LIBOR as an example, below is a non-exhaustive list of some differences between LIBOR and its ARRs:

  • LIBOR is a term rate benchmark across multiple tenors (O/N, 1W, 1M, 2M, 3M, 6M, 12M), whereas ARRs are overnight rates with no term element
  • LIBOR is a forward-looking rate, whereas ARRs are backward-looking rates
  • LIBOR contains a premium for bank credit and term liquidity risk. In contrast, while the precise nature of each ARR may vary, in general the ARRs contain little or no such additional premiums because they are overnight and sometimes secured
  • LIBOR is administered by a single administrator for all currencies, following a single set of characteristics, whereas ARRs have distinct characteristics and administrators