What Was 30-Day LIBOR and What Replaced It?

The London Interbank Offered Rate, widely known as LIBOR, served as a benchmark interest rate for decades. It was a reference point for the cost of borrowing between financial institutions, influencing financial instruments and transactions worldwide.

Understanding LIBOR and its 30-Day Tenor

LIBOR was defined as the rate at which a panel bank could borrow funds from other banks in the London interbank market. This benchmark was calculated daily from estimates submitted by a panel of leading global banks. The Intercontinental Exchange (ICE) administered the calculation and publication of these rates.

Submissions were collected from panel banks for each currency and tenor. To prevent outliers, the highest and lowest submissions were discarded. The remaining submissions were then averaged to determine the daily LIBOR rate. This methodology provided a representative benchmark of short-term borrowing costs.

LIBOR was published for five major currencies and across seven different maturities, known as tenors. These tenors included:
Overnight
One week
One month
Two months
Three months
Six months
Twelve months

The “30-day” tenor referred to the one-month maturity. While the three-month LIBOR was widely referenced, other tenors like the 30-day and six-month rates were used depending on the financial product or contract.

LIBOR’s Role in Global Finance

LIBOR’s widespread adoption stemmed from its consistent and transparent nature as a reference rate. It quickly became integral to the pricing and valuation of a vast array of financial products globally. Its influence permeated both institutional finance and consumer products, shaping borrowing costs for millions.

For instance, LIBOR served as the benchmark for many adjustable-rate mortgages (ARMs) and student loans. The interest rates on these loans would periodically reset based on the prevailing LIBOR rate plus a predetermined margin. This meant that as LIBOR fluctuated, so too did the interest payments for borrowers.

Beyond consumer lending, LIBOR was foundational for corporate loans and financial derivatives. Interest rate swaps, which are agreements to exchange interest payments, frequently used LIBOR as their floating rate component. Its broad application provided a standardized method for financial institutions to manage interest rate risk and price financial instruments.

The Cessation of LIBOR

LIBOR has largely ceased to be published for most currencies and tenors, marking a transition in global finance. The financial industry, guided by regulators, decided to move away from this benchmark. Concerns regarding its reliability and representativeness led to this decision.

The phasing out of LIBOR followed a structured timeline. Most LIBOR settings, including all British Pound, Euro, Swiss Franc, and Japanese Yen settings, and the 1-week and 2-month US Dollar LIBOR settings, ceased at the end of 2021. The remaining US Dollar LIBOR settings (overnight, 1-month, 3-month, 6-month, and 12-month) concluded publication after June 30, 2023. This cessation meant that financial contracts could no longer rely on these rates for new transactions.

The transition away from LIBOR was a global effort, driven by a need for more robust and transparent benchmarks. Reliance on panel bank submissions, which sometimes involved expert judgment, contributed to questions about its integrity. The move aimed to replace LIBOR with more robust, transaction-based rates, thereby enhancing financial stability and market confidence.

The Rise of Alternative Reference Rates

With the cessation of LIBOR, new benchmark rates have emerged as replacements in global financial markets. These alternative reference rates (ARRs) are based on observable, transaction-based data, aiming for greater transparency and reliability. The transition has introduced different successor rates in various jurisdictions.

In the United States, the primary successor rate is the Secured Overnight Financing Rate, known as SOFR. SOFR measures the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement (repo) market. Its design, based on a large volume of transactions, makes it a robust and resilient benchmark. SOFR reflects the funding conditions of the overnight Treasury repo market, representing an economic cost of lending and borrowing.

Other major economies have adopted their own ARRs. The Sterling Overnight Index Average (SONIA) serves as the primary alternative in the United Kingdom. SONIA is an overnight unsecured interest rate benchmark reflecting the average of interest rates banks pay to borrow sterling overnight from other financial institutions.

Similarly, the Euro Short-Term Rate (€STR) has replaced LIBOR for euro-denominated transactions in the Eurozone. €STR reflects the wholesale euro unsecured overnight borrowing costs of euro area banks. These new rates provide the current standard for financial contracts that previously referenced LIBOR.