Ice Libor and Its Alternatives: A Look at the Future of Finance

Ice Libor, a benchmark interest rate, has been a cornerstone of financial markets for decades. It's based on the average rate at which banks lend to each other in London.

The problem with Ice Libor is that it's been plagued by scandals and manipulation, leading to its eventual replacement. In 2017, regulators announced that they would phase out Libor by 2021.

In its place, regulators have introduced several alternatives, including Sonia, which is based on the average rate at which banks lend to each other in the London money market.

Libor was the average of the interest rates that some of the world's leading banks charged each other for short-term loans.

It was used as a benchmark to set rates for various loans, mortgages, and corporate bonds, making it a crucial reference point for financial transactions.

The Intercontinental Exchange (ICE) took over the administration of Libor from the British Bankers Association in early 2014.

The London Interbank Rate, also known as LIBOR, was the average interest rate that top banks charged each other for short-term loans.

It was a widely used benchmark to set rates for various loans, mortgages, and corporate bonds.

The Intercontinental Exchange (ICE) is the parent company of the New York Stock Exchange (NYSE) and took over the administration of LIBOR from the British Bankers Association (BBA) in early 2014.

The ICE Benchmark Administration (IBA), a unit of ICE, is the actual administrator of LIBOR.

The LIBOR system ceased to be used at the end of June 2023 and was replaced with other benchmarks.

IBA no longer publishes any LIBOR figures, but still reports synthetically-created rates for one-, three-, and six-month USD LIBORs and the three-month GBP LIBOR.

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LIBOR was used as a reference rate for commercial loans, derivative products, and bank lending.

There were several LIBORs, with ICE issuing benchmark rates for loans in five currencies: the U.S. dollar, pound sterling, euro, Japanese yen, and Swiss franc.

The currencies were the U.S. dollar, pound sterling, euro, Japanese yen, and Swiss franc, while the maturities were overnight, one week, and one, two, three, six, and 12 months.

That made for 35 different LIBORs, but the one most commonly quoted was the three-month dollar rate.

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Ice Libor has a rich history dating back to 1997, when it was first introduced as a benchmark rate for interbank lending.

In the early 2000s, Ice Libor became a widely used and trusted benchmark rate, with over 1,000 banks contributing to its calculation.

However, in 2012, the Libor scandal broke, revealing widespread manipulation of the Libor rate by major banks, which led to a significant decline in its credibility.

The scandal prompted the Financial Conduct Authority (FCA) to take control of Libor's administration and implementation of reforms to prevent future manipulation.

As a result, the Libor rate began to decline, and by 2018, it had fallen by over 50% compared to its pre-scandal levels.

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Libor was stopped due to concerns about its reliability and susceptibility to manipulation.

The global financial crisis and a series of scandals related to rate manipulation led to these concerns.

Regulators and industry stakeholders decided to transition to alternative, more robust benchmark rates.

The proposed new ICE LIBOR is slightly lower than the current one, with a greater variability day-by-day.

This is because banks in the current LIBOR often didn't think it was worth making small changes on a daily basis, whereas in ICE LIBOR there is always some change, however small.

In fact, the new ICE LIBOR rate is only marginally different on a daily basis.

The new rate is based on actual transactions, making it a more accurate reflection of what the market is actually doing.

Interestingly, the new rate is only some 1-3 basis points below the old LIBOR rate in the market conditions between mid-September and mid-December last year.

This shows that the new ICE LIBOR clearly reflects banks' funding costs more closely and cannot be manipulated as easily.

The greater accuracy and transparency of the new rate are major improvements over the current system.

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Alternatives to ICE LIBOR have been developed to address its limitations and reliability issues. One such alternative is the Secured Overnight Financing Rate (SOFR) in the United States, which is based on actual transactions.

The Sterling Overnight Index Average (SONIA) in the UK is another alternative to ICE LIBOR, also based on actual transactions. These alternatives are considered more reliable than ICE LIBOR.

The US Dollar ICE Bank Yield Index is a fully transaction-based index designed to measure the yields at which investors are willing to invest US dollar funds in large, internationally active banks.

Key alternatives to ICE LIBOR include:

The calculation of LIBOR was a complex process, with banks answering a question that was often ambiguous in its phrasing.

Between 11 and 18 member banks would respond to ICE's question, providing their rate estimates.

Their rates were then ranked, and the top and bottom quartiles were discarded.

The remaining rates, which numbered between 5 to 10, were then averaged to produce the final LIBOR rate.

From BBA to ICE, a significant shift occurred in the LIBOR system. The British Bankers' Association (BBA) initially oversaw LIBOR, but it was later taken over by the Intercontinental Exchange (ICE).

The BBA's involvement in LIBOR dated back to the 1960s, when Greek banker Minos Zombanakis organized an $80 million syndicated loan for the Shah of Iran from the London offices of JPMorgan Chase.

Intercontinental Exchange (ICE) has been working on a replacement for LIBOR, and they've introduced the U.S. Dollar ICE Bank Yield Index for review and comment by market participants. This index is designed to measure the yields at which investors are willing to invest U.S. dollar funds in large, internationally active banks on a wholesale, unsecured basis.

The index has been developed to meet the potential needs of lenders, borrowers, and other users of non-derivative or "cash" products that have historically referenced short-term interest rate benchmarks, such as LIBOR, in their contracts. The use of the U.S. Dollar ICE Bank Yield Index is expected to be more reliable than LIBOR.

ICE has conducted a period of testing on a preliminary methodology for the index over the past year, and the results are published on their website. Market participants and stakeholders are invited to review and provide feedback on the index and its proposed methodology via email by March 31, 2019.

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The U.S. Dollar ICE Bank Yield Index is expected to be launched and published during the first quarter of 2020, pending successful testing and market feedback. However, there is no guarantee that the index will be published, and users of U.S. Dollar LIBOR should not rely on the potential publication of the index when developing and executing transition or fallback plans.

Here are some key features of the U.S. Dollar ICE Bank Yield Index:

The U.S. Dollar ICE Bank Yield Index is a promising alternative to LIBOR, and its development is an important step in the transition away from this benchmark.

ICE LIBOR had a significant impact on interest rates on mortgages, particularly for borrowers with adjustable-rate mortgages. Changes in LIBOR rates could lead to fluctuations in monthly mortgage payments.

If you had an adjustable-rate mortgage tied to LIBOR, you might have noticed your payments going up or down depending on the rate changes. This is because LIBOR rates influenced the interest rates on these mortgages.

Borrowers with LIBOR-based ARMs had to be prepared for potential rate changes, which could affect their monthly budgets. This is why it's essential to understand how LIBOR rates can impact your mortgage payments.

The influence of ICE LIBOR on interest rates on mortgages is a crucial aspect to consider when taking out a mortgage.

Ice Libor is a complex financial concept, but it's essential to understand its implications.

The London Interbank Offered Rate, or Libor, is a benchmark interest rate that banks charge each other for short-term loans. It's used to set interest rates for trillions of dollars' worth of financial instruments worldwide.

In 2012, regulators discovered widespread manipulation of Libor, leading to a scandal that rocked the global financial system.

Many banks were found to have submitted false Libor rates to gain an advantage in financial markets. This manipulation had a ripple effect on the entire economy, causing billions of dollars in losses.

Ice Libor, also known as the "Fallback Rate", was introduced as a temporary solution to replace Libor. It's based on actual transactions between banks, rather than submitted rates.

However, Ice Libor has its own set of challenges, including a lack of transparency and potential manipulation.

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