What are IBORs?

What are IBORs?

Interbank offered rates (“IBORs“) are reference rates or benchmarks used in financial transactions to determine amounts payable by the parties to those financial transactions, including in the loan market and in the derivatives, bonds and structured finance markets.

IBORs have featured in these financial markets for a long time and as such:

  • An enormous number of transactions (by value and volume) feature an IBOR of some description
  • IBORs are deeply embedded in the global financial system as a whole

Broadly speaking, IBORs represent an average of the rates at which certain banks (“Panel Banks“) believe that they could borrow money in the interbank market on an unsecured basis for a given period (i.e. the “tenor” or maturity) from overnight to twelve months in a given currency.  Importantly, IBORs only reflect the rate at which the Panel Banks expect that they could borrow money.  They are not a measure of an individual Panel Bank’s actual cost of borrowing in the interbank market.

IBORs are deeply embedded not only because they feature in such a wide variety of financial instruments but also because they have other applications, including, for example:

  • Regulatory cost of capital calculations
  • Valuation (e.g. discount rates for pension liabilities)
  • Performance benchmarks (e.g. for asset managers)
  • Accounting (e.g. fair value calculation for discounting provisions and impairments)
  • Late payment calculations in commercial contracts

Products & Counterparties

Currencies

  • GBP
  • USD
  • EUR
  • JPY
  • CHF

Products

  • Debt securities – e.g. corporate bonds, sovereign bonds, agency notes, floating rate notes, resettable fixed rate notes, covered bonds, capital instruments, perpetual notes
  • Over-the-counter derivatives – e.g. interest rate swaps, cross-currency swaps, equity derivatives, commodity derivatives, inflation derivatives
  • Exchange-traded derivatives – e.g. interest rate options and interest rate futures
  • Short-term instruments – e.g. repos, reverse repos, time deposits, commercial paper
  • Securitised products – e.g. mortgage-backed securities, asset-backed securities, commercial mortgage-backed securities, collateralised loan obligations and other collateralised debt obligations

Counterparties

  • Investment banks
  • Commercial banks
  • Retail banks
  • Asset managers
  • Financial markets infrastructure
  • Pension schemes
  • Insurance / reinsurance companies
  • Non-bank lenders
  • Corporates

The main IBORs are:

  • London Interbank Offered Rate (“LIBOR“)
  • Euro Interbank Offered Rate (“EURIBOR“)
  • Tokyo Interbank Offered Rate (“TIBOR“)

LIBOR (which is technically known as ICE LIBOR see What is LIBOR) is the reference rate that is most widely-used in financial markets worldwide.  It is estimated that LIBOR underpins approximately USD 260trn of loans and derivatives globally.

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