In the years following the 2008 financial crisis, manipulation attempts by LIBOR panel banks, false reporting, and declining liquidity in interbank funding markets generated doubt in LIBOR benchmark rates, and ultimately led to plans for their replacement with more reliable benchmarks. Without backing by underlying transactions, LIBOR depended more on expert judgment than quantifying true bank funding cost, and huge volumes of derivatives and cash products referencing it was a concern. Alarmed regulators established new benchmark regulation (BMR), and alternative reference rates (ARR) or risk-free rates (RFR) that comply with the BMR were developed and recommended by national working groups of several jurisdictions.
Secured / Unsecured
Term Rate available?
LIBOR / IBOR available?
SOFR Term Rate (CME, ICE)
yes, until 06/2023
Not yet, but Term ESTR planned
no LIBOR, but reformed EURIBOR is still available
Term SONIA (ICE, Refinitiv)
synthetic LIBOR only for 1, 3, 6 months terms, until the end of 2022 and possibly longer
synthetic LIBOR only for 1, 3, 6 months terms, until the end of 2022
no term rate
These variables can make it difficult to settle on a risk analysis model that satisfies compliance for every jurisdiction. Asset liability management (ALM) managers use Interest Rate Gap reports assessing the impact of interest changes on Net Interest Income (NII) and Economic Value of Equity (EVE). Another core ALM function is the FTP process, which transfers interest rate risk into the hands of Treasury experts, where conventions like lookback, observation shift, payment delay, and lockout have to be dealt with. There will generally be new kinds of mismatches that were unknown in LIBOR times.
The LIBOR reform has started a chain of significant changes in the financial institutions—from existing valuation approaches to product modeling and risk models, hedging strategies and modifications to the ALM risk profile of each firm. SS&C Algorithmics supports an advanced multi-curve, open construction framework for the simultaneous bootstrapping of LIBOR, OIS and the new Risk-Free Rates with global solvers. An important enhancement on the curve construction is the introduction of new RFR instruments that can be leveraged for the curve construction.