LIBOR Transition to Alternative Reference Rates
LIBOR is gone for good. Here's what replaced it and how Indian trade finance was repriced.
LIBOR, the London Interbank Offered Rate, was for decades the reference rate for foreign currency loans, including the buyers' credit and PCFC that Indian banks arranged. It was based on banks' submissions of what they would pay to borrow from each other, unsecured, for terms like 3 or 6 months. The UK regulator, the FCA, concluded that with so few real term unsecured deposit transactions behind the submissions, LIBOR could not be sustained.
LIBOR has now ended completely. The FCA records that the last USD panel settings ceased at the end of June 2023 and the temporary "synthetic" USD settings were published for the final time on 30 September 2024. Every LIBOR reference in trade finance has had to move to an alternative reference rate (ARR).
You save ₹300
- Full 120-question mocks
- ICC rules coverage
- Topic-wise practice
One payment, no subscription · Valid for 2 months
The Main ARRs
Overnight rates based on actual transactions, published by or for each currency's central bank.
US dollar
ARR
SOFR (Secured Overnight Financing Rate)
Published by
Federal Reserve Bank of New York
Secured?
Yes: overnight repos backed by US Treasury securities
Sterling
ARR
SONIA (Sterling Overnight Index Average)
Published by
Bank of England
Secured?
No: unsecured overnight borrowing
Euro
ARR
€STR (euro short-term rate)
Published by
European Central Bank
Secured?
No: unsecured overnight borrowing
Japanese yen
ARR
TONA (the uncollateralised overnight call rate)
Published by
Bank of Japan
Secured?
No: unsecured overnight call money
| Currency | ARR | Published by | Secured? |
|---|---|---|---|
| US dollar | SOFR (Secured Overnight Financing Rate) | Federal Reserve Bank of New York | Yes: overnight repos backed by US Treasury securities |
| Sterling | SONIA (Sterling Overnight Index Average) | Bank of England | No: unsecured overnight borrowing |
| Euro | €STR (euro short-term rate) | European Central Bank | No: unsecured overnight borrowing |
| Japanese yen | TONA (the uncollateralised overnight call rate) | Bank of Japan | No: unsecured overnight call money |
How ARRs Differ From LIBOR
- Forward-looking vs backward-looking
- LIBOR for a 6-month period was known on day one. An overnight ARR is compounded over the interest period, so the exact rate is often known only at the end ("in arrears").
- Bank credit risk
- LIBOR was the rate for unsecured lending to banks over a term, so it carried a bank credit element. ARRs are overnight and close to risk-free, so they usually sit lower, and a contract switching from LIBOR needs an added spread to stay economically similar.
- Tenor
- LIBOR was quoted for several terms, from overnight to 12 months. Each ARR in the table is an overnight rate; longer periods are built by compounding it.
- Fallback clause
- Contract wording that says which rate replaces LIBOR when it stops. RBI urged banks in 2021 to put robust fallbacks in every LIBOR contract running past cessation.
Quick practice on banking operations. No signup.
What RBI Changed in Indian Trade Finance
- 1
No new LIBOR deals (July 2021)
RBI asked banks to stop entering new LIBOR-linked contracts as soon as practicable and in any case by December 31, 2021, and to stop using MIFOR, the rupee forward rate built on LIBOR. FBIL began publishing a modified MIFOR for new contracts from June 30, 2021.
- 2
PCFC (August 2021)
Pre-shipment credit in foreign currency, earlier priced on LIBOR, EURO LIBOR or EURIBOR, may use any widely accepted ARR in the currency.
- 3
FCNR(B) deposits (November 2021)
Interest-rate ceilings moved from LIBOR/swap to the overnight ARR/swap, with ceilings raised by 50 basis points.
- 4
Trade credit ceilings
The all-in-cost ceiling is now the benchmark (an interbank rate or ARR of 6-month tenor) plus 300 basis points for new foreign currency trade credit. Older LIBOR-linked credits whose benchmark was switched to an ARR are allowed a higher spread, 350 basis points.
How the IIBF Exam Tests This
Expect matching questions (which ARR for which currency, which is secured) and scenario questions about a buyers' credit or PCFC priced on LIBOR. The common traps: picking SONIA as secured (only SOFR in this list is), saying LIBOR still runs for USD, and using an older book's "LIBOR plus 350 bps" ceiling for a new trade credit, when the current figure is benchmark plus 300 bps.
FAQs
When did LIBOR end?expand_more
The last USD LIBOR panel settings ceased at the end of June 2023. Synthetic 1, 3 and 6-month USD settings were published for the last time on 30 September 2024, ending LIBOR entirely.
What replaced LIBOR for US dollar loans?expand_more
SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York, based on overnight repo transactions backed by US Treasury securities.
What is the difference between SOFR and SONIA?expand_more
SOFR is the US dollar ARR and is secured, based on Treasury repos. SONIA is the sterling ARR, administered by the Bank of England, and is unsecured.
What is the benchmark for trade credit after LIBOR?expand_more
RBI defines it as any widely accepted interbank rate or ARR of 6-month tenor in the currency of borrowing. The ceiling for new foreign currency trade credit is that benchmark plus 300 basis points.
Next steps
- Buyers' Creditarrow_forward
- Suppliers' Creditarrow_forward
- PCFC and EBRarrow_forward
- Syllabusarrow_forward
120 questions, 2 hours, scored instantly.