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Libor Transition

1. What’s the problem with Libor rates?

The London interbank offered rate, or Libor, was set up by the London-based British Bankers Association in 1986 as a way to price syndicated loans and interest-rate swaps. The rate was determined by a daily poll, which asked banks to estimate how much it would cost to borrow from each other without putting up collateral. Because fewer banks make such unsecured loans, Libor doesn’t always reflect actual practice. And because it doesn’t always reflect actual transactions, either, it’s prone to manipulation. Regulators and prosecutors, after the 2008 financial crisis, found that dozens of firms worldwide had colluded to set the benchmark at levels that would benefit their own Libor-linked portfolios. Large European and U.S. banks paid billions of dollars to settle rigging and other charges.

Following such scandal-ridden on Libor and after more than two years of study, a U.S. Federal Reserve-sponsored group on June 2017 recommended replacing the interest-rate benchmark with one based on the bustling Treasury repurchase, or repo, market.

2. What is the new reference rate?

The Alternative Reference Rates Committee, made up of Wall Street banks and regulators, decided to use a rate based on the cost of overnight loans that use U.S. government debt as collateral.

The Federal Reserve Bank of New York decided, starting in the first half of 2018, to publish daily what it calls a broad Treasury repo rate, in cooperation with the U.S. Treasury Department’s Office of Financial Research.

Following this decision the Financial StabilityBoard (FSB) and other worldwide regulators designed the Interbank Overnight rate (Risk-free Rates) as successors of the (L)IBOR.

Other country for each respective currencies, started to study the succession through dedicated Working Group (here below links to Euro and Swiss Franc dedicated working groups)


3. How is the new Risk-free rate calculated?

It includes data from actual transactions throughout the repo market and/or money market. Some of the data, for example, will come from the so-called tri-party market, where a third party clears transactions between two other parties. Other data will come from inter-dealer transactions and some deals done directly between two parties, or bilateral transactions, will also be included. The benchmark will exclude the Fed’s own repo transactions.  

The table below provides with the designated rates for the main currencies, their definition and the related contribution.

CurrencyRisk-Free RateTransaction basis
US DollarSecured Overnight Financing Rate (SOFR)Secured Treasury repo rate
British PoundSterling Overnight Index Average (SONIA)Unsecured wholesale rate
Japanese YenTokyo Overnight Average Rate (TONA)Unsecured wholesale rate
EuroEuro Short-Term Rate (€STR)Unsecured wholesale rate
Swiss FrancSwiss Average Rate Overnight (SARON)Secured general collateral repo rate

SOFR is a benchmark interest rate for dollar-denominated derivatives and loans. It’s based on transactions in the Treasury repurchase market and is seen as preferable to LIBOR since it is based on data from observable transactions rather than on estimated borrowing rates. The Federal Reserve Bank of New York began publishing the secured overnight financing rate (SOFR) in April 2018.
Key Internet page:

SONIA was established in 1997 by the Wholesale Markets Brokers' Association (WMBA) in Great Britain and is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market. Calculated each business day in London, SONIA is based on actual transactions, reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions or institutional and can be consulted on the internet pages of the WBMA or on similar pages. The Bank of England is the administrator for SONIA, taking the responsibility for its governance and publication every London business day.
Key Internet page:

TONA is an interest rate benchmark also known as a reference rate or a benchmark rate. It is a measure of the cost of borrowing in the Japanese yen unsecured overnight money market and is the near risk-free rate (RFR) for Japanese yen markets. TONA was introduced in 2016 and is administered and published by the Bank of Japan. It is sometimes referred to as “TONAR”.
Key Internet page:

ESTER (€STR) is an overnight interest rate representing an average of the wholesaleeuro unsecured overnight borrowing costs of banks located in the euro area. The €STR is published on each business day based on transactions conducted and settled on the previous business day with a maturity date of T+1 which are deemed to have been executed at arm’s length and thus reflect market rates in an unbiased way.
The €STR is administered and published since October 2019 by the European Central Bank.
Key Internet page:

SARON reflects the conditions for secured overnight transactions and is based on the most liquid segment of the Swiss franc money market. It is calculated as a volume-weighted average of transactions and binding quotes in the order book of SIX Repo AG's electronic trading platform and provided they lie within the parameters of the quote filter.
SARON was introduced on 25 August 2009 with historical data available since 30 June 1999 is administered by SIX and is continually calculated in real time and published every 10 minutes. In addition, a fixing is conducted three times a day at 12pm, 4pm and 6pm.
Key Internet page:

4. Why is the new rate better than Libor?

The fundamental reason is that the new rate will reflect real, not hypothetical, transactions and thus may be impossible to manipulate. For instance the US broad repo rate is based on about $660 billion in daily transactions. Further by counting only secured loans, the new rate will reflect a more prevalent form of financing. The (L)IBOR rates weren’t based on real transactions and were subject to manipulation.

5. What happens next and how long will the switch take?

On March 2021 the Financial Conduct Authority (FCA) the LIBOR regulator and administrator confirmed it will stop the fixing and contribution of the (L)IBOR rates for Euro, British Pound, Swiss Franc, and Japanese Yen from 31.12.21.

Contribution for US Dollar Libor will continue until June 2023, through a synthetic rate provided by Bloomberg to manage the transition on some specific contracts (e.g. Mortgages with fixed and longer maturities). Nonetheless, no new contracts can be set with such rate as reference.

On Lombard Credit contracts, the LIBORs will be replaced progressively by the new related RFR, at the next loan’s maturity mainly starting from December 2021 and all along the first quarter of 2022.

6. How concretely that will apply to Mirabaud credit rates?

On the basis of the above Risk-free Overnight rates, Mirabaud will contribute the Mirabaud Refinancing Rate, composed by the following three underlying constituents:

  1. the Overnight Risk-Free Rate, SARON for CHF, €STR for EUR, SOFR for USD and SONIA for GBP, calculated from transactions carried out on the money market, or their successors rates, and
  2. the Mirabaud’s liquidity and funding cost, and
  3. the credit risk premium applied to the credit maturity and the structure of the related yield curve.

The Mirabaud Reference Rate, available for all tenors up to 12 months is published on a business daily basis, into the dedicate Internet page publicly available.

The total rate applied to loans, will be fixed two days before the related Value Date, with a minimum threshold for currencies currently with negative market rates.

These rates are indicative and do not include the Credit margin, or “spread”, which is separately agreed with borrowers, based on the defined standard bank’s tariff.

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