Intercontinental Exchange London Interbank Offered Rate (ICE LIBOR): A Comprehensive Overview

Understanding the Intercontinental Exchange London Interbank Offered Rate (ICE LIBOR)

ICE LIBOR represented the average interest rate that top global banks charged one another for short-term borrowing. Serving as a key benchmark, it influenced the rates on a wide array of financial products including loans, mortgages, and corporate bonds.

The Intercontinental Exchange (ICE), which owns the New York Stock Exchange and numerous other global markets, oversees the ICE Benchmark Administration (IBA), the entity responsible for managing LIBOR.

In 2014, ICE assumed LIBOR administration from the British Bankers Association (BBA). However, LIBOR was fully phased out by June 2023, replaced by more reliable benchmarks like the Sterling Overnight Index Average (SONIA).

Currently, IBA only publishes synthetic versions of certain USD and GBP LIBOR rates, which are scheduled to cease by 2024.

Key Highlights

• ICE Benchmark Administration managed LIBOR, often referred to as ICE LIBOR.
• The LIBOR system ended in June 2023, transitioning to benchmarks such as SONIA.
• ICE once administered 35 LIBOR rates spanning five currencies and seven maturities.
• The three-month USD LIBOR was the most widely referenced rate.
• ICE LIBOR's calculation methodology differed from the previous BBA approach, prompting the emphasis on the full term "ICE LIBOR."

How ICE LIBOR Functioned

LIBOR served as the foundational reference rate for setting interest rates on loans globally. Every morning, ICE published benchmark rates across five currencies—U.S. dollar, British pound sterling, euro, Japanese yen, and Swiss franc—and seven maturities ranging from overnight to 12 months, totaling 35 distinct LIBOR rates.

The three-month USD LIBOR was the most commonly quoted and used rate.

Practical Applications of LIBOR

LIBOR was embedded in the language of countless loan agreements and financial contracts, influencing everything from complex derivatives to everyday mortgages and student loans. Borrowers paid interest rates calculated as LIBOR plus a margin, so fluctuations in LIBOR directly impacted monthly payments.

LIBOR Calculation Process

Each day, ICE surveyed contributing banks with the question: "At what rate could you borrow funds by requesting and accepting interbank offers in a reasonable market size just before 11 a.m. London time?"

Between 11 and 18 banks responded depending on the currency. ICE then discarded the highest and lowest quartile of submissions and averaged the middle values to determine the published LIBOR.

Distinctive Features and Historical Context

ICE emphasized the term "ICE LIBOR" because its calculation method differed significantly from that used by the BBA, which previously published LIBOR for more currencies and maturities.

The LIBOR Manipulation Scandal

Previously, the BBA's LIBOR relied on submissions from over 200 banks. However, a scandal erupted in 2012 when it was revealed that some banks manipulated rates to their advantage, undermining LIBOR's integrity.

Transition from BBA to ICE

When ICE took over, fewer banks contributed, but increased oversight and stricter governance improved transparency and reduced manipulation risks.

Historical Insight

LIBOR’s origins date back to the 1960s when Greek banker Minos Zombanakis arranged a syndicated loan for the Shah of Iran, marking the start of this influential benchmark.

Comparing ICE LIBOR with Other Benchmarks

Unlike the U.S. federal funds rate, which is set periodically by the Federal Reserve as a monetary policy tool, LIBOR was an international rate reflecting market conditions based on interbank lending, not central bank policy.

Current Usage of ICE LIBOR in the U.S.

As of January 2022, LIBOR ceased to be used for issuing new loans in the U.S. Only a limited set of synthetic USD and GBP LIBOR rates remain published until 2024.

What Is Synthetic LIBOR?

Synthetic LIBOR rates are calculated without bank input and do not reflect actual market conditions, serving as temporary measures during the transition away from LIBOR.

Reasons for Discontinuing ICE LIBOR

Concerns over LIBOR’s reliability and vulnerability to manipulation led regulators and market participants to adopt alternative benchmarks that are more transparent and transaction-based.

Impact of ICE LIBOR on Mortgage Interest Rates

ICE LIBOR significantly influenced adjustable-rate mortgages, where changes in LIBOR affected borrowers’ monthly payments.

Alternatives to ICE LIBOR

New benchmarks like the Secured Overnight Financing Rate (SOFR) in the U.S. and SONIA in the UK have replaced LIBOR. These rates are based on actual transaction data, enhancing reliability and reducing manipulation risks.

Conclusion

ICE LIBOR was a cornerstone benchmark representing average short-term lending rates among leading global banks. The most referenced rate was the three-month USD LIBOR. With its phase-out completed in June 2023 (except for a few synthetic rates ending in 2024), the financial industry has transitioned to more robust benchmarks, marking a new era in interest rate referencing.

Discover engaging topics and analytical content in Monetary Policy as of 23-10-2023. The article titled " Intercontinental Exchange London Interbank Offered Rate (ICE LIBOR): A Comprehensive Overview " provides new insights and practical guidance in the Monetary Policy field. Each topic is meticulously analyzed to deliver actionable information to readers.

The topic " Intercontinental Exchange London Interbank Offered Rate (ICE LIBOR): A Comprehensive Overview " helps you make smarter decisions within the Monetary Policy category. All topics on our website are unique and offer valuable content for our audience.