What is a LIBOR rate?
LIBOR, the acronym for London Interbank Offer Rate, is an un-secured short-term borrowing rate determined by selected AA rated banks (also known as Contributor Banks). It is published for 5 currencies; British pound (GBP), Euro (EUR), US dollar (USD), Swiss franc (CHF) and Japanese yen (JPY) and for 7 different maturities, namely, overnight, 1 week, 1 month, 2 months, 3 months, 6 months and 12 months. It is published each London business day and is administered by ICE Benchmark Administration (IBA). A brief summary of the methodology followed by IBA for publication of LIBOR is provided below.
Level 1 (Transaction Based) - Where a Contributor Bank has sufficient eligible transactions, LIBOR is calculated as a volume weighted average price (“VWAP”) of such eligible transactions, with a higher weighting for transactions booked closer to 11:00 AM London time. Eligibility criteria for transactions are specified by IBA.
Level 2 (Transaction Derived) - Where a Contributor Bank has insufficient eligible transactions to make a Level 1 submission, it will seek to make a submission based on transaction-derived data, including time-weighted historical eligible transactions adjusted for market movements and linear interpolation. Eligibility criteria for transaction derived data are specified by IBA.
Level 3 (Expert Judgement) - Where a Contributor Bank has insufficient eligible transactions or transaction-derived data to make a Level 1 or a Level 2 submission, it will submit the rate at which it could fund itself at 11:00 AM London time with reference to the unsecured, wholesale funding market. Each Contributor Bank agrees its defined Level 3 submission methodology with IBA, basing its rate on transactional data, related market instruments, broker quotes and other market observations. Level 1 and Level 2 submissions are mathematically based on transaction data and the methodology is common to all contributing banks. There is no discretion for contributors.
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