When Will LIBOR Be Discontinued? A Timeline

The London Interbank Offered Rate (LIBOR) was a widely used global benchmark interest rate, influencing trillions of dollars in financial products. It represented the average rate major banks borrowed from one another in the London interbank market. Concerns about its reliability, particularly after manipulation scandals and a decline in interbank lending, prompted a global effort to transition away. The goal was to replace LIBOR with robust, transaction-based rates, ensuring greater transparency and stability in financial markets.

The Discontinuation Timeline

The discontinuation of LIBOR followed a planned timeline, with different currencies and tenors ceasing at various points. Most non-U.S. dollar (USD) LIBOR settings (GBP, EUR, JPY, CHF), along with 1-week and 2-month USD LIBOR, ceased publication after December 31, 2021. This marked a significant global transition milestone.

For USD LIBOR, the remaining tenors—overnight, 1-month, 3-month, 6-month, and 12-month—ceased being published after June 30, 2023. To provide a temporary bridge for “tough legacy” contracts, “synthetic” LIBOR was introduced. The 1-month, 3-month, and 6-month USD LIBOR settings continued in synthetic form until September 30, 2024. Synthetic sterling LIBOR settings for 1-month and 6-month ceased in March 2023, and the 3-month synthetic sterling LIBOR ceased in March 2024. Regulators prohibited new contracts referencing LIBOR well before these final cessation dates.

Understanding LIBOR’s Replacements

The financial industry moved towards Risk-Free Rates (RFRs) as the preferred alternative to LIBOR. RFRs are based on observable, overnight transactions, making them more resilient and less susceptible to manipulation than LIBOR, which relied on panel bank submissions.

LIBOR was a forward-looking, unsecured rate that incorporated a credit risk component, reflecting banks’ cost of unsecured borrowing. In contrast, RFRs are backward-looking, overnight rates, considered near risk-free because they are often based on secured transactions or have minimal credit risk.

The primary replacement for USD LIBOR is the Secured Overnight Financing Rate (SOFR). SOFR is calculated based on transactions in the U.S. Treasury repurchase agreement (repo) market, where participants borrow cash overnight collateralized by U.S. Treasury securities. This transactional basis, with daily volumes often around $1 trillion, contributes to SOFR’s reliability and transparency.

For GBP LIBOR, the Sterling Overnight Index Average (SONIA) serves as the main replacement, reflecting overnight unsecured lending transactions in the sterling market. Other currencies adopted their own RFRs. The Euro Short-Term Rate (€STR) is the benchmark for the Eurozone, representing overnight borrowing costs of banks based on actual transaction data. Similarly, the Tokyo Overnight Average Rate (TONA) replaced JPY LIBOR, and the Swiss Average Rate Overnight (SARON) became the alternative for CHF LIBOR. The absence of a credit risk component in RFRs, unlike LIBOR, often necessitates a credit spread adjustment when transitioning existing contracts to maintain economic equivalence.

Impact on Financial Products and Contracts

The discontinuation of LIBOR had widespread implications for financial products and existing contracts, necessitating adjustments across the financial landscape. For legacy contracts like variable-rate loans, bonds, and derivatives, the transition involved implementing “fallback language.” This language, often pre-negotiated or incorporated through industry protocols, specifies how the interest rate benchmark would switch to an alternative RFR upon LIBOR’s cessation.

New contracts now predominantly reference RFRs directly. For loans, including adjustable-rate mortgages (ARMs) and other variable-rate consumer loans, lenders communicated with borrowers regarding the transition to new indices, often SOFR-based rates. The Adjustable Interest Rate (LIBOR) Act in the U.S. provided a framework for contracts without adequate fallback provisions, generally replacing LIBOR with a SOFR-based rate and a statutory spread adjustment.

In the derivatives market, the International Swaps and Derivatives Association (ISDA) developed the ISDA IBOR Fallbacks Protocol and Supplement. These mechanisms allowed market participants to amend existing derivative contracts to incorporate fallback provisions that automatically switch to RFRs plus a fixed spread adjustment upon LIBOR’s cessation. Floating-rate notes (FRNs) also transitioned, with their interest rate calculations moving from LIBOR to RFRs. Individuals and businesses should review their contracts, understand new rate calculations, and engage with their financial institutions to ensure a smooth transition and address any potential changes in payment obligations.