In 2012 the authorities finally did something about the scandalous rigging of BBA (British Bankers’ Association) LIBOR in the late 1990s and early 2000s. The job of making LIBOR more rigorous and developing the new LIBOR was given to ICE Benchmark Administration Limited (IBA) a London subsidiary of the Intercontinental Exchange. The new ICE LIBOR would change how LIBOR is calculated. 

The aim was to reduce the amount of judgement in the rate that a LIBOR bank submitted, and make their submission be based on the transactions that had actually been carried out, since the last time the bank had submitted a rate (+ a weighting for the most recent). If the bank did not have the data, they were required to explain their judgements. (Importantly the method by which each bank calculated their rate had not previously been standardised and still was affected by the differences in the banks’ internal systems.) 

Essentially, the ICE LIBOR submission rate from each bank would now be based on “What rate have you borrowed at?”

Also the UK government required that all of the processes be overseen by a LIBOR Oversight Committee – on which there are two corporate treasurers.

Testing the effectiveness of the new LIBOR

With the proposed ICE LIBOR rate, the issue now is: does this new ICE LIBOR make a material difference to the rate? This is why IBA ran a three-month testing period during which all 20 LIBOR panel banks were required to make parallel LIBOR submissions. This test was carried out between September 15 and December 15, 2017. The results were published in March on the ICE web-site, alongside the published LIBOR using the existing methodology for the same period for everyone to see.

The survey tracked the published ICE LIBOR v. new, proposed ICE LIBOR for each of the major currencies: overnight, 1 week, 1 month, 2 months, 3 months, 6 months, and 12 months. 

Current ICE LIBOR v. proposed ICE LIBOR results

CTMfile analysis of the results published by the IBA showed that, in general, the new rate is slightly lower and has slightly more variability day-by-day, as the two USD 3 month rate charts below show:

(Left hand chart: Variation of new ICE LIBOR from current ICE LIBOR for 3m USD: Blue line = new ICE LIBOR%, Orange = current ICE LIBOR%, Grey line = new – current in basis points.

Right hand chart: Day-to-day variation of new and old ICE LIBOR for 3m USD: Blue line = new ICE LIBOR%, Orange = current ICE LIBOR%, Grey line = difference in b.p.s in new ICE LIBOR from the previous day’s, Yellow line = difference in b.p.s in current ICE LIBOR from the previous day’s.)

The greater variability of the new rate is primarily because, in the current LIBOR, quite often banks didn’t think it was worth making small changes on a daily basis, while in ICE LIBOR there is always some change, however small. 

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, Also, interestingly, the new rate is only marginally different on a daily basis. 

The other finding is 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.

Impact on corporates 

With any new LIBOR rate, the vital question for all corporate treasurers is: “Does the new ICE LIBOR rate do the job you thought it did before, i.e. do you believe it reflects the banks’ funding costs?”

ICE and the authorities and many users believe that it still does, and also that it does it better, and in a much less manipulatable way.

Importantly, it is thought that, only the largest companies will notice a difference by the odd basis point in their borrowing costs, but most companies won’t notice the difference in their weighted average costs at all.

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CTMfile take: The proposed new ICE LIBOR clearly does reflect the banks’ funding costs more closely and, vitally, it cannot be manipulated so easily. Good work IBA and the LIBOR banks.