The 2008 Financial Crisis changed the world of Banking. Many malpractices by the Banks and various financial institutions came into light and the regulators started scrutinizing and penalizing them. The world’s most important number “LIBOR” came under the sword of the Regulators. In this article we will explore the origins and the fall of the once revered LIBOR rate.

1. 10/4/21, 10:44 PM
1/6
The Inglorious Fall of Libor
Sudha G. Bhushan
CA
The 2008 Financial Crisis changed the world of Banking. Many malpractices by the Banks and various
financial institutions came into light and the regulators started scrutinizing and penalizing them. The world's
most important number "LIBOR" came under the sword of the Regulators. In this article we will explore the
origins and the fall of the once revered LIBOR rate.
I. Introduction
The LIBOR stands for London Interbank Offered Rate. It is the benchmark for various major global banks to
lend short term loans to one another. It is globally accepted and revered bench mark rate which helps to
determine the borrowing cost between banks. LIBOR is also the basis for various other securities like
consumer loans, hence it also affects the general public as much as banks.
The rates, in the early days were computed based on three currencies i.e. the dollar, the yen and the pound.
However, over time more currencies were added, until recently LIBOR rates were calculated on five major
currencies, that is the Swiss Franc, Japanese Yen, US Dollar, British Pound, and the Euro.
LIBOR rates were derived based on situations like the rate on the inter banks offers for short-term loans prior
to 11 am and then taking a reasonable market size of the same. Such situation made the LIBOR vulnerable to
manipulation and hence to tackle these concerns the British Banker's Association (BBA)in 1986 took over the
governing process of the LIBOR. Under the BBA, LIBOR became the default standard interest rate for
transaction between banks. The BBA was administrating the LIBOR until 2014 when the Intercontinental
Exchange (IE) took over the administration of the LIBOR.
There are many equivalents of the LIBOR around the world such as Mumbai Interbank Offer Rate (India),
Shanghai Interbank Offer Rate (China), European Interbank Offer Rate (Europe) and Tokyo Interbank Offer
Rate (TIBOR).
II. How is LIBOR determined?
LIBOR is determined with the Panelists consisting of contributing banks. 35 Rates are posted each day with
interest rates compiled for the various currencies.
The Process of setting LIBOR starts with asking the panelists the rate at which they are going to lend the other
banks. This is done prior early in the day even before the working hours begin. The rates are presented in top-
down manner of listing. The outlying quotes are eliminated once the 25% of the lower and higher quoted rates
are removed. Then the remaining rates are averaged and will be rounded to five decimal places. The process is
carried out across the currencies for each maturity. 1

2. 10/4/21, 10:44 PM
2/6
III. Loss of Credibility
LIBOR as an instrument has been losing value since 2007-08. After the 2008 Recession, LIBOR saw a
decrease in tenors based on which the LIBOR was calculated. LIBOR has major banks on its panel to
determine the rate. In 2012, the LIBOR scandal came into light and major banks came under scrutiny. The
LIBOR scandal shed light on the various malpractices by various banks where they colluded with each other to
manipulate banking interest rates. Major Banks like UBS, Royal Bank of Scotland, Barclays, Citigroup,
JPMorgan Chase and Deutsche Bank were implicated in the scandal. The Banks submitted artificially low
LIBOR rates to keep them at the preferred levels. This was allegedly done to increase the profits of traders
possessing holdings in LIBOR related securities. The scandal resulted in hefty fines being imposed on the
banks among them RBS,UBS, Deutsche and Barclays were fined the most. Almost 9 billion pound was levied as
fines on various companies.
IV. Alternative Rates and the Way Forward
As a result of the scandals, LIBOR was to be phased out by June 30,2023 according to the regulators in the UK.
The LIBOR is a very useful reference in setting up benchmarks, it is used for all kinds of financial products and
instruments and is also a benchmark to reflect the performance of a financial instrument. So finding an
Alternative Reference Rate (ARR) is difficult given LIBOR has been in use for decades and overwhelming
changes would be needed to make it as robust and accurate as LIBOR. The ARR must also be a good reference
for lending, funding and financial activities beyond the money market. Jurisdictions where LIBOR was heavily
used have already identified the alternative rates which are based on short tenor contracts which are secured
and liquid. These ARRs have moved on from only considering inter banking markets, they also include money
markets, insurance companies and investment funds. Few of the ARR are:
(a) SORA
Singapore for its existing benchmark, the Singapore Dollar Swap Offer Rate (SOR), uses LIBOR as one of its
components. Singapore has elected to use Singapore Dollar Overnight Rate Average (SORA), a transaction-
based benchmark with no term component as the alternative.
(b) SOFR
In U.S.A, the Secured Overnight Financing Rate (SOFR) is the replacement of LIBOR. The main difference
between SOFR and LIBOR is that LIBOR is based on conjecture and SOFR is based on actual transactions.
SOFR is based on the actual transactions with US Treasury and LIBOR was based on estimations of borrowing
rates. Though SOFR is based on Short Term loans observed in the repo market where there is extensive trading
in the US treasury. It is based on observations rather than estimation of borrowing rates of the LIBOR which
makes SOFR more accurate.
Transition from LIBOR to SOFR
The Federal Reserve Board and The New York Fed created The Alternative Reference Rates Committee
(ARRC). The ARRC is a group of private-market participants that were convened to ensure a smooth and
successful transition from U.S. dollar (USD) LIBOR to a more robust alternative reference rate, the Secured
Overnight Financing Rate (SOFR).
♦ In 2017, the ARRC selected SOFR as the rate that represents best practice for use in certain new USD
derivatives and other financial contracts.
♦ To ensure a smooth transition to SOFR, the Committee developed the Paced Transition Plan with
the aim to encourage the adoption of SOFR, the plan mentioned steps and timelines to be covered to

3. 10/4/21, 10:44 PM
3/6
smoothly adopt SOFR. 2
♦ ARCC is also supporting the launch of financial products which are based in SOFR so there is enough
liquidity.
♦ The ARRC recommended some practices which will help achieve the required transitioning
milestones across derivatives, loans, securitizations, etc.
♦ The ARRC has also recommended language on USD LIBOR fallback contract language for cash
products based on the fact that many contracts for products referencing USD LIBOR do not
adequately account for the possibility that LIBOR may no longer be usable.
(c) Sterling Overnight Index Average
The Sterling Overnight Index Average (SONIA) is administered by the Bank of England. They take
responsibility for the governance and publication of SONIA. SONIA is based on actual transactions and
accurately reflects the average of the interest rates that the banks give to borrow money from other financial
institutions. It is the risk-free benchmark rate which will replace LIBOR. The Bank of England's Monetary
Policy Committee decides what monetary policy action tyey take as a central bank and then implement the
monetary policy by taking an active role in the financial markets using the Sterling Monetary Framework.
To support the Risk-Free Rate transition in sterling markets the English Bank began publishing the SONIA
Compounded Index from 3 August 2020. This simplifies the calculation of compounded interest rates and in
doing so provides a standardized basis through its publication as an official source.
Timleline of LIBOR

4. 10/4/21, 10:44 PM
4/6
V. The Indian Context
India first constituted the Committee on Financial Benchmarks in June,2013 to review the situation of
Financial Benchmarks. The Committee recommended to set up the Financial Benchmark India Pvt. Ltd
(FBIL), was set up to act as an administrator for benchmarks. The FBIL looks over various benchmarks like
Overnight Mumbai Interbank Outright Rate (MIBOR). The MIFOR benchmark is a synthetic benchmark, a
composite rate with the USD LIBOR and USD INR forward premia as its components. Essentially, the MIFOR
comes the cost of borrowing in US dollars and converting the same to INR, thus artificially representing the
domestic term interest rate and Outright Rate (MIFOR), Market Repo Overnight Rate (MROR), etc.
In India, connection to LIBOR from loan contracts like External Commercial Borrowings (ECBs) linked to
LIBOR and derivatives linked to LIBOR or to the MIFOR.

5. 10/4/21, 10:44 PM
5/6
The concerns for India for transitioning from LIBOR at the end of December 2021 are similar to those faced by
other countries, especially those which rely on LIBOR interest rates.
A study of existing loan/derivative contracts threw light on the fact that contractual fallback clauses catering to
cessation of LIBOR are not available in existing contracts, which will continue beyond 2021. Fallback clauses
customised to domestic markets but having its foundations in global markets needs to be done.
The Reserve Bank of India has also given some suggestions for the way forward. In a letter to the senior
management of all the Commercial Banks, dealers and financial institutions, the Chief General Manager of the
Reserve Bank of India explained a Roadmap for the LIBOR Transition. The Banks were encouraged
incorporate robust clauses well before the cessations dates into their financial contracts. Banks were also
encourages to stop using the Mumbai Interbank Forward Outright Rate (MIFOR), published by the Financial
Benchmarks India Pvt Ltd (FBIL), which references the LIBOR. Banks were asked to mitigate risks arising
from transitional issues including valuations and contractual clauses. The banks were asked to sell products
referencing the Alternative Reference Rates.
On July 08, 2021, The RBI released a press release advising the banks about the key steps to be taken for the
transition.
They suggested that Banks and financial institutions are encouraged to cease entering into new financial
contracts that reference LIBOR as a benchmark and instead use any widely accepted alternative reference rate
(ARR), as soon as practicable and in any case by December 31, 2021.
Banks and financial institutions are urged to incorporate robust fallback clauses in all financial contracts that
reference LIBOR and the maturity of which is after the announced cessation date of the LIBOR settings.
Banks and financial institutions are encouraged to ensure that new contracts entered into before December 31,
2021 that reference LIBOR and the maturity of which is after the date on which LIBOR ceases or becomes non-
representative include fallback clauses.3
VI. Conclusion
The transition from benchmark rate which has been part of the financial markets for decades is not an easy
task. To ensure a smooth transition various parties and entities will have to take a role to ensure the same.
The RBI in India has taken various steps to look into the Interbank Rates transition has tasked the Indian
Banks Association to overlook the same. They have taken various measures to streamline the process by
making arrangements for LIBOR transition, rates and methodology to arrive at a standard rate, and
conducting outreach to the market participants.
RBI in their "Dear CEO" letter has taken proactive steps to encourage banks to be prepared for the transition
and take into account the existing contracts with LIBOR as a reference for the financial products.
The RBI in India sadly has been reactive in its approach rather than proactive to ensure a smooth transition
from LIBOR to an ARR. The RBI's various committees on Interbank Rates have not come up with any
acceptable language to incorporate into contracts based on LIBOR, once LIBOR becomes ineffective. The RBI
should also recommend an ARR, based on which Indian Banks and Traders can do their work.
The transition from LIBOR as a standard international benchmark to various countries adapting their own
benchmarks will also be challenge to global coordination and financial markets. Special Effort must be taken
by the authorities to make sure that the new robust references are not vulnerable to manipulation by traders.

6. 10/4/21, 10:44 PM
6/6
Major efforts must be made by Specialized Global Financial agencies to ensure smooth transitions and
coordination in a post-LIBOR financial world where the horrors of the 2008 Financial Crisis can be avoided.
VII. Sources
♦ Kagan, J. (2021, February 24). How the London Interbank Offered Rate (LIBOR) Works.
Investopedia. https://www.investopedia.com/terms/l/libor.asp
♦ Fernando, J. (2021, February 24). The LIBOR Scandal. Investopedia.
https://www.investopedia.com/terms/l/libor-scandal.asp
♦ Chief General Manager, Reserve Bank of India. (2020, November 11). Reserve Bank of India
|Notifications [Press release]. https://www.rbi.org.in/Scripts/NotificationUser.aspx?
Id=12128&Mode=0
♦ Reserve Bank of India. (2020, November 11). Reserve Bank of India - RBI Bulletin [Press release].
https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=19898
♦ Bank of England- Sonia Interest Rate Benchmark
https://www.bankofengland.co.uk/markets/sonia-benchmark
♦ Alternative Reference Rates Committee (ARRC). (n.d.). - Alternative Reference Rates Committee.
New York Fed. Retrieved September 13, 2021, from https://www.newyorkfed.org/arrc/sofr-
transition
♦ SALERNO, DAVID. RUDDY, JOHN. LAWRENCE, ROBYN. (2020, September 1). Transitioning
from LIBOR. Strategic Finance. https://sfmagazine.com/post-entry/july-2020-transitioning-from-
libor/
♦ Subramanian Natarajan. (2021, July 14). RBI: Foreign exchange rate – The rise & ignominy of
LIBOR. TaxGuru. https://taxguru.in/rbi/rbi-foreign-exchange-rate-rise-ignominy-libor.html
■■
1. Corporate Finance Institute. (2020, October 16). LIBOR.https://corporatefinanceinstitute.com/ resources/
knowledge/ trading- investing/ libor/
2. The ARRC's Paced Transition Plan for Developing SOFR Markets dated 07/29/2021
3. The Chief General Manager of the RBI. (2021, July 8). Reserve Bank of India - Press Releases [Press
release].https://www.rbi.org.in/ Scripts/ BS_PressReleaseDisplay.aspx?prid=51870