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LIBOR

The London Interbank Offered Rate (LIBOR) is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks. It is used as a benchmark interest rate.

Detailed Definition

The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 London time.

This definition is amplified as follows:

  • The rate which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.
  • Contributions must represent rates formed in London and not elsewhere.
  • Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.
  • The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.
  • he definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.
  • The British Bankers’ Association publishes a basic guide to the BBA Libor which contains a great deal of detail as to its history and its current calculation.

    Background

    LIBOR was formerly known as BBA Libor. BBA stands for British Bankers’ Association which used to administer the rates.

    In October 1984, the British Bankers’ Association (BBA), in concert with other parties including the Bank of England, eventually created the BBA standard for interest rate swaps, or “BBAIRS” terms. Part of this standard included the fixing of BBA interest-settlement rates, the predecessor of BBA Libor. From September 2, 1985, the BBAIRS terms became standard market practice. BBA Libor fixings did not start officially before January 1, 1986.

    Calculation

    Libor is calculated by the Intercontinental Exchange (ICE) and published by Thomson Reuters.

    It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties.

    Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, “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?”

    The BBA discards the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23% trimmed mean. The average is reported at 11:30 am.

    In 1986, the Libor initially fixed rates for three currencies. These were the US dollar, British pound sterling and the Deutschemark. Over time this grew to sixteen currencies. After a number of these currencies in 2000 merged into the euro there remained ten currencies.[30] Following reforms of 2013 Libor rates are calculated for 5 currencies

    Active Currencies
    1. U.S. Dollar (USD)
    2. Euro (EUR)
    3. British Pound Sterling (GBP)
    4. Japanese Yen (JPY)
    5. Swiss Franc (CHF)

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