What is LIBOR?
LIBOR, as described by its administrator, the Intercontinental Exchange (“ICE”), is a widely used benchmark for short-term interest rates, providing an indication of the average rates at which LIBOR Panel Banks think they could obtain wholesale, unsecured funding for set periods in particular currencies.
LIBOR as a standardised rate was first developed in the 1980s and was administered by the British Bankers’ Association (“BBA”). The BBA administered LIBOR from 1986 to January 2014 when ICE, through ICE Benchmark Administration Ltd, took over.
LIBOR is currently produced across five currencies (CHF, EUR, GBP, JPY, USD) across the following tenors (i.e. maturities):
- spot next
- one week
- one month
- two months
- three months
- six months, and
- twelve months.
Historically – before the Wheatley Review of 2012 – LIBOR was published for ten currencies in fifteen tenors (rather than the current five currencies and eight tenors).
How is LIBOR calculated?
LIBOR is a “polled rate”. This means that it is derived from a combination of submissions made by LIBOR Panel Banks. LIBOR Panel Banks are presently required to submit a rate in response to the following question from ICE:
“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?”
From these submissions is taken the ‘trimmed arithmetic mean’. This means that the highest and lowest quartiles are removed and the rest is averaged on an arithmetic mean basis.