Home » NEWS » Banking & Finance » COMMERCIAL FINANCE 701: The Passing of LIBOR
Illustration by Ford Williams



The death knell for LIBOR officially sounded on July 27, 2017, when the UK’s Financial Conduct Authority broadcast it would cease maintenance of the internationally-used interest rate benchmark beyond December 31, 2021.  The surprise announcement was surprising only as to the timing of the press release and the sunset date.  The Wall Street Journal dissed the rate back in 2008 and the abortive concept went on life-support in 2012 after a well-publicized LIBOR-manipulation scandal.


Like many acronyms, the common use of the initialism LIBOR handicaps an appreciation of its meaning.  The “London Interbank Offered Rate” originated in 1986 as a rather convenient, unscientific and easily manipulated interest rate average that banks in London would charge each other for loans of a specific maturity.   As an example, “1 month LIBOR” represented the average interest rate of select banks for a one month loan.

The variable rate loan for a corporate borrower might be quoted as 1 month LIBOR plus 250 basis points. (100 basis points = 1%.)  As of Aug. 3, 1 month LIBOR for loans in U.S. dollars was 1.23056%.  Add the 250 basis points and the corporate borrower would pay a rounded 3.73% annualized interest rate, adjusted monthly.

Previously known as “BBA LIBOR” – referencing the British Banker’s Association who concocted the yardstick – the International Continental Exchange took over calculation in 2014, and BBA LIBOR became ICE LIBOR.  ICE grandiosely describes the ICE LIBOR as a “polled rate” that “reflect[s] the short term funding costs of major banks active in London, the world’s most important wholesale financial market.”  Really?

LIBOR is, admittedly, the industry standard for variable rate loans and interest rate swaps. Since the 2012 scandal, the rate calculations are handled by independent bodies and overseen by British regulatory agencies. Currently, LIBOR is a “trimmed arithmetic mean” of annualized rates from contributor banks, quoted for five currencies and seven maturities (one day to one year), all at 11 a.m. London time.


LIBOR touches everyone, including us Yanks across the Pond.   If you are not borrowing money using LIBOR, then you are purchasing products and services from companies that borrow using LIBOR.  Your variable home mortgage may be tied to LIBOR, along with your children’s student loans.  Variable rate corporate loans, real estate loans, and interest rate swaps are routinely tied to LIBOR.

At the end of 2016, the U.S. Department of Treasury’s unheralded Office of Financial Research (OFR) estimated LIBOR permeated “at least $10 trillion in loans and an estimated $150-160 trillion in the notional value of derivatives contracts” in the USA.  Whoa.

A reasonable person might question why the U.S. – the number 1 world economy for over 117 years with a current GNP about 7 times that of the UK – uses a benchmark rate determined by London banks.


The typical consumer can sit back and, appropriately, say “so what?” – mainly because there is little the consumer can do.  For banks, corporations, developers and investors, the fluid situation bears scrutiny.

In the first instance, the problem is market disruption.  Just as nature abhors a vacuum, financial markets revere certainty.  Change necessarily involves risk, and risk involves costs.  In the second instance, there is a host of decisions to be made, and some of those decisions need to be made now.

If you are lender, you are currently faced with evaluating pricing options (including a replacement index) and revised loan documentation.  For new and existing variable rate loans with maturities prior to Dec. 31, 2021, a lender might continue to use ICE LIBOR and existing documentation.  There is, however, no assurance that LIBOR will continue to be meaningfully reported through 2021. For new variable rate loans with maturities beyond 2021, a change is required.  As for those irksome existing loans with maturities beyond 2021, you have some time.  Many loans will be refinanced or prematurely paid off.

Prospective borrowers must evaluate proposals that may incorporate a new index or an alternative (fallback) index should LIBOR fail while the loan is outstanding.  If you are an existing borrower with a maturity beyond 2021, just be patient and see how the industry addresses the issues.

Interest rate swap providers, a part of the complex derivates world, are probably studying ISDA “protocols,” perusing the 160-page 2006 ISDA Definitions, consulting with consultants, waiting to join the band wagon, and taking comfort that everyone is aboard the same galleon.


The corpulent Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) created the U.S. Financial Stability Oversight Council (FSOC), whose recommendations in May 2014 galvanized the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York (FRBNY) to “convene” the Alternative Reference Rates Committee (ARRC), a “group of private-market participants,” to help select a LIBOR replacement. The OFR is a member of ARRC.

On June 22, 2017, ARRC announced the selection of a “broad Treasuries repo financing rate, which the [FRBNY] has proposed publishing in cooperation with the [OFR], as the rate that, in its consensus view, represents best practice for use in certain new U.S. dollar derivatives and other financial contracts.”

Millennials might be inclined to tweet OMG or LOL.

Conclusion & Summary   

Acronyms and nomenclature notwithstanding, U.S. regulatory agencies, industry organizations, and lenders are evaluating the problems and possible solutions. The prospect of a prompt selection of a replacement rate appears likely in 2017.  So, while the overall situation resembles a well-known British passenger liner that sank in 1912, in this instance there is amble time to maneuver around the ICEberg.

Proverbs have their failings, too often due to a one-size-fits-all approach packaged in a clever, short phrase.  Still, in this case, haste might make waste, good things probably come to those who wait, and there is safety in numbers.

Ben Williams and Molly Jeffcoat Moody are attorneys engaged in an active commercial law practice at Watkins & Eager PLLC.   Ben and Molly are both recognized by Chambers USA and Best Lawyers in America.   Ben was selected as Best Lawyer’s 2017 Project Finance Lawyer of the Year in Jackson, Mississippi.   Additional information is available at www.watkinseager.com.


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