Why All The Recent Talk About Libor & SOFR?
Libor is in the process of being phased out, and some big questions remain.
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We have a question here from Sergei saying that he's been seeing and hearing lots of news lately about LIBOR and some of the other short term interest rate products and he wants to know what the significance of all of these new recent releases or emphasis on the LIBOR has been.
So let's start with some introductions into LIBOR and SOFR. Now LIBOR is short for The London Inter-Bank Offered Rate and SOFR is short for the Secured Overnight Financing Rate.
Now, both of these products or rates are part of STIRS, which are basically short term interest rate products and LIBOR and SOFR and SONIA is just some of the current benchmarks being used for interest rate futures and related products, things like interest rate swaps and futures contracts, loans, mortgages, etc.
So drastic changes in LIBOR will affect all the associated products and rates that are connected to that LIBOR rate because is is a benchmark and it's been used as a benchmark for the past 50 years, more after the second World War. And according to some estimates, there are roughly 400 trillion transactions that are basically underpinned by the LIBOR rate.
Now what's important about LIBOR recently is that it has been, you know, it's been used for that benchmark for a whole range of products and rates as we said, especially as it relates back to something like the Eurodollar futures contract, which has also seen as an overall gauge of short term interest rates and interest rate expectations and it can be seen as a gauge of overall market health.
Now why you are hearing all of these current noises and news about LIBOR is because LIBOR is busy being phased out and it will be completely phased out by December 2021. And currently there's lots of deliberation and talks on which other STIR should replace the LIBOR with other ones being mentioned like the SOFR as well as SONIA.
Now the main problem with this transition now, you know, is that all of those contracts, all of those 400 trillion transactions and contracts that it's been underpinned by LIBOR as its reference, right, will basically not be valid anymore after December 2021.
So if it expires after 2021, it means that all of them will probably need to be rewritten and with a new rate as its base and that'll, of course, involve a whole lot of costs, a whole lot of headaches for firms, who'll need to rewrite them and check them and double check them so from a legal perspective, it's really going to be a big headache.
So there's a lot of firms talking about possible AI intervention to try and make that process a little bit more seamless. But that is the whole hype about LIBOR recently. It will be phased out by the end of next year and it does pose a few problems in terms of the legality, but not really something that is a major concern for us in the immediate term from a trading point of view, so to speak.
So I hope that helps, Sergei, with the question. Any others, as usual, please don't hesitate to let us know.
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There’s a link below were you can learn more about it
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----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a question here from Sergei saying that he's been seeing and hearing lots of news lately about LIBOR and some of the other short term interest rate products and he wants to know what the significance of all of these new recent releases or emphasis on the LIBOR has been.
So let's start with some introductions into LIBOR and SOFR. Now LIBOR is short for The London Inter-Bank Offered Rate and SOFR is short for the Secured Overnight Financing Rate.
Now, both of these products or rates are part of STIRS, which are basically short term interest rate products and LIBOR and SOFR and SONIA is just some of the current benchmarks being used for interest rate futures and related products, things like interest rate swaps and futures contracts, loans, mortgages, etc.
So drastic changes in LIBOR will affect all the associated products and rates that are connected to that LIBOR rate because is is a benchmark and it's been used as a benchmark for the past 50 years, more after the second World War. And according to some estimates, there are roughly 400 trillion transactions that are basically underpinned by the LIBOR rate.
Now what's important about LIBOR recently is that it has been, you know, it's been used for that benchmark for a whole range of products and rates as we said, especially as it relates back to something like the Eurodollar futures contract, which has also seen as an overall gauge of short term interest rates and interest rate expectations and it can be seen as a gauge of overall market health.
Now why you are hearing all of these current noises and news about LIBOR is because LIBOR is busy being phased out and it will be completely phased out by December 2021. And currently there's lots of deliberation and talks on which other STIR should replace the LIBOR with other ones being mentioned like the SOFR as well as SONIA.
Now the main problem with this transition now, you know, is that all of those contracts, all of those 400 trillion transactions and contracts that it's been underpinned by LIBOR as its reference, right, will basically not be valid anymore after December 2021.
So if it expires after 2021, it means that all of them will probably need to be rewritten and with a new rate as its base and that'll, of course, involve a whole lot of costs, a whole lot of headaches for firms, who'll need to rewrite them and check them and double check them so from a legal perspective, it's really going to be a big headache.
So there's a lot of firms talking about possible AI intervention to try and make that process a little bit more seamless. But that is the whole hype about LIBOR recently. It will be phased out by the end of next year and it does pose a few problems in terms of the legality, but not really something that is a major concern for us in the immediate term from a trading point of view, so to speak.
So I hope that helps, Sergei, with the question. Any others, as usual, please don't hesitate to let us know.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
