Page 36 - Banking Finance February 2023

ARTICLE

LIBOR Scandal After 3 years of deliberations ARRC recommends
Secured Overnight Financing Rate (SOFR) as the
Several major financial institutions e.g., Deutsche Bank,
preferred alternative to LIBOR.
Barclays, Citigroup, JPMorgan Chase and the Royal
Bank of Scotland colluded with each other to manipulate In April 2018 - FED start publishing SOFR rates on its
the LIBOR. website.
Although the scandal came to light in 2012, It is
In July 2018 - Fannie Mae (Government owned housing
estimated that the collusion in question had been
Mortgage Institution) becomes the first entity to issue
ongoing since as early as 2003.
instrument linked to SOFR.
During the LIBOR Scandal, traders as many of these
In August 2018 - Barclays becomes the first bank to
banks deliberately submitted artificially low or high
issue instruments based on SOFR.
interest rates in order to force the LIBOR higher or
lower, in an effort to support their own institutions' On November 30, 2020, the Federal Reserve announced
derivative and trading activities. that LIBOR will be phased out and eventually replaced
by June 2023. In the same announcement, banks were
Regulators in both the United States and the United
Kingdom levied some $9 billion in fines on banks involved instructed to stop writing contracts using LIBOR by the
in the scandal, as well as a slew of criminal charges. end of 2021 and all contracts using LIBOR should wrap
up by June 30, 2023.
As a result of the rate fixing scandal, questions around
LIBOR's validity as a credible benchmark rate have
arisen and it is now being phased out. Comparisons b/w LIBOR and ARR
According to the Federal Reserve and regulators in the
LIBOR ARR
U.K., LIBOR will be phased out by June 30, 2023 and is
Overview Unsecured un- Overnight rates
being replaced by the Secured Overnight Financing Rate
collateralized rate based on actual
(SOFR).
at which banks transactions
Britain's Financial Conduct Authority (FCA) took the
lend / borrow
responsibility for LIBOR supervision away from the
from another
British Bankers Association (BBA) and turned it over to
the Intercontinental Exchange's Benchmark Calculation Forward looking Backward looking
Administration (IBA). based on banks based on actual
The IBA is an independent U.K. subsidiary of the private survey transactions
U.S.-based exchange operator, Intercontinental Stability Less efficient, More efficient,
Exchange (ICE). LIBOR is now commonly known as ICE stable stable
LIBOR.
Term structure Fixed term A single date
overnight rate
LIBOR to ARR
Publication 11:45 AM London Published at
FCA has announced that it will support LIBOR only until
time. Published different times for
2021, at which point it hopes to transition to an
for various each currency
alternative system.
durations and in
From 1 January 2022, 26 of the 35 LIBOR settings, which various currencies
relate to specific currencies and time periods, are no
Validity Rates published Single day validity
longer available.
are valid for 2 days
Alternate Reference Rates - ARR
Secured Overnight Financing Rate (SOFR)
In 2014 Federal Reserve Board convened a Alternate
The SOFR is a benchmark interest rate for dollar-
Reference Rate Committee (ARRC) to come up with
denominated derivatives and loans.
suggestion for a new rate.

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