The London Interbank Offered Rate, is often referred to as ‘the world’s most important number’, as it is a global benchmark interest rate upon which trillions of financial contracts rest, including mortgages, consumer loans and credit cards. The benchmark interest rate underpins more than 400 trillion USD of outstanding contracts, with maturities ranging from overnight to 30-plus years, including derivatives, loans and bonds. Given the scope of the impact on the real economy and financial markets, planning for the transition needs to be well underway.
Interbank Offered Rates (IBORs) play a pivotal role in the functioning of financial markets. The transition away from IBOR represents one of the biggest challenges facing financial services firms. The reform has been ongoing for more than two years, during which market-infrastructure providers, regulators, buy- and sell-side firms and trade associations have merged their efforts in steering some of the most complex transformation programmes the financial industry has undertaken.
This paper explores the development of the IBOR reform. The first part details the status quo, some of the various aspects and challenges involved and outlines the effects of migrating from IBORs to risk-free rates (RFRs). The second part of the paper outlines the preparations firms need to make to accommodate a smooth transition.
Dmitry Pugachevsky, Director - Research, Quantifi
Irina Ursachi, Independent Risk Management Consultant