Today it is estimated that £40 trillion of derivatives are based on LIBOR, which represents millions of contracts. To move to a new benchmark would require a huge amount of boring admin to redocument each lease, each mortgage, each swap, each bond, etc. For what? To move to a new standard, like the BofE’s new Sonia, that is no more reliable or more based on transaction data than the new ICE LIBOR?

ICE LIBOR more accurate reflection

In 2012 the job of developing a new benchmark was given to ICE Benchmark Administration Limited (IBA) a London subsidiary of the Intercontinental Exchange. The new ICE LIBOR is based on the transaction that banks did rather than on what banks ‘thought’. It represents a much more accurate reflection of what the market is actually doing.

IBA tests carried between September 15 and December 15, 2017 showed that the new ICE Libor rates were slightly lower and had slightly more variability day-by-day than the existing LIBOR, see our analysis of the results. AND that, “Critically, it is felt that the new ICE LIBOR rate, because it is based on the transaction that banks did rather than on what banks thought, represents a more accurate reflection of what the market is actually doing.” 

Importantly, the other finding was that, for all of the currencies, it appears that the new ICE LIBOR rates were only some 1-3 basis points below the old LIBOR rate in the market conditions between mid-September and mid-December last year. 

Why change?

Before moving to a new benchmark rate requiring all this re-documentation work, corporate treasurers need to ask themselves:

1. Does the new benchmark reflect the banks’ funding costs and better than the new ICE Libor?
2. Will the new benchmark have a material impact on my borrowing rates?

The basic answer to these questions are:

1. ICE and the authorities and many users believe that the new ICE Libor now does reflect the banks costs, and also that it does it better, and in a much less manipulatable way. 
2. Only the largest companies will notice a difference in using ICE Libor by the odd basis point in their borrowing costs, but most companies won’t notice the difference in their weighted average costs at all.

So why change?

Your role in ensuring ICE LIBOR survival

The survival of ICE Libor is not automatic. Corporate treasurers and the associations need to campaign for its survival by saying they want to and will keep using ICE Libor rather than moving to a new benchmark rate.

If enough corporate treasury departments decide to continue to use the new ICE Libor, it will survive and thrive.

The banks are willing, i.e. if it is a commercially viable project, etc., then IBA says it will seek to continue to publish the rates the market wants.

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CTMfile take: Corporate treasury departments and treasury associations: the future of ICE Libor is in your hands. You can choose whether all this redocumentation admin is needed or not.