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Macro & Investment Insights

What you need to know about the IBOR transition

  • 16 July 2021
  • 10min read

What is IBOR transition and how is AXA IM approaching it?

What is IBOR transition ?

IBOR transition refers to the discontinuation of Interbank Offered Rates (IBORs) as the interest rate benchmark, and the move to using alternative ‘risk free’ benchmarks. Benchmarks currently in
use include the London Interbank Offered Rate (LIBOR), and the Euro Overnight Index Average (EONIA).

Why are markets moving away from LIBOR?

Trigger 1: LIBOR manipulation

In 2012, the Financial Conduct Authority (FCA) began imposing fines on firms for the attempted manipulation of LIBOR. The firms involved have been fined over £757m for LIBOR and EURIBOR related misconduct.

Trigger 2: Little transactional volume

Since the 2008 financial crisis, the number of panel banks reporting their funding rate has declined and the remaining banks that still submit a rate are reporting significantly fewer transactions. The absence of active underlying markets raises a serious question about the sustainability of LIBOR benchmarks, which are based upon these markets, and LIBOR is no longer seen as a robust representative of lending transactions.

Consequences

As a result, the Financial Stability Board provided its initial recommendations on IBORs in 2014, with the objective of avoiding certain risks relating to a lack of robustness, unreliability of methodologies and scarcity of data used for benchmark calculation. In 2017, the FCA and the Bank of England raised questions about the future sustainability of these rates, obtaining voluntary agreements from LIBOR panel banks to continue to make their daily submissions until the end of 2021, when all LIBOR settings will cease.

Find out more about our IBOR transition project
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