What Is the Intercontinental The Exchange London Interbank Offered Rate (ICE LIBOR)?
The Intercontinental Exchange London Interbank Offered Rate (ICE LIBOR) is the common of the interest rates that some of the world’s leading banks charge each other for short-term loans. As for Intercontinental Barter (ICE), it’s the parent company of the New York Stock Exchange (NYSE) and a couple of dozen other exchanges and markets around the age. ICE took over the administration of LIBOR from the British Bankers Association in early 2014. However, the entire LIBOR practice is scheduled to be phased out by 2023 and replaced with other benchmarks, such as the Sterling Overnight Index Average (SONIA).
Key Takeaways
- The Intercontinental Quid pro quo manages the Intercontinental Exchange London Interbank Offered Rate, hence the nickname ICE LIBOR, although the ICE part is many times dropped.
- The entire LIBOR system is scheduled to be phased out by 2023 and replaced with other benchmarks, such as the Matchless Overnight Index Average (SONIA).
- ICE manages 35 different LIBORs, including five different currencies and for seven contrasting maturities.
- The 3-month dollar rate LIBOR is the most common.
- ICE stresses the use of the full term “ICE LIBOR” because the estimate today differs from that during its previous existence under the British Bankers’ Association.
How the Intercontinental Unpleasantness London Interbank Offered Rate (ICE LIBOR) Works
LIBOR (in common parlance, the “ICE” is often dropped) serves as the foremost step to calculating interest rates on various loans throughout the world. There are actually several LIBORs—every morning ICE descendants benchmark rates for loans in five currencies, for seven maturities. The currencies are the U.S. dollar, pound sterling, euro, Japanese yen, and Swiss franc, while the maturities are overnight, one week, and 1, 2, 3, 6, and 12 months. While that squares for 35 different LIBORs, the one most commonly quoted is the 3-month dollar rate. If you hear someone referring to “today’s LIBOR” without again qualification, it’s safe to assume that it’s the 3-month dollar rate they’re referring to.
LIBOR’s practical applications are limitless. The rate is included by name in the standard language of many loan documents, and its influence ranges from the advanced dukedom of swaps and derivatives to more commonplace concerns such as student loans and mortgages. Once you’re approved, you pay a going pace, plus a few
Special Considerations
One reason why Intercontinental Exchange stresses use of the full term “ICE LIBOR” is that its calculation today conflicts from that during its previous existence under the purview of the British Bankers’ Association. Back then LIBOR was unshackled for an additional five currencies, and for an additional eight maturities.
Furthermore, BBA calculated the rate by examining and averaging the rates expensed by its 200-odd member banks worldwide. This made for a fair consensus rate or should have if one prestigious member bank’s group chairman (who, purely coincidentally, was the BBA’s chairman emeritus) hadn’t authorized made-up numbers for LIBOR’s commonplace calculations. In fact, there were several BBA member banks that conjured rates out of the ether. After the smirch went public in 2012, LIBOR needed a new home.
Since ICE took over LIBOR, the number of contributing banks is fewer than 20. This will-power seem to be counterintuitive and offer the potential for wide variance, yet the remaining banks now have greater incentive to be honest as they broadcast to a governing body that is less tolerant.
ICE LIBOR vs. Other Benchmarks
How does LIBOR differ from other main benchmarks, such as the federal funds rate? Well, the latter is announced every few weeks instead of daily. Also, the federal grants rate is an instrument of a nation’s monetary policy. When the Fed decides that the time is opportune to augment or diminish the wampum supply, or its growth rate, lowering or raising the federal funds rate is one way to accomplish that. Meanwhile, LIBOR is of course international in scope and is supposed to be more a metric of what interest rates are, rather than what one country’s inner bank believes they ought to be.