Once the world’s most important financial benchmark, the London Interbank Offered Rate (LIBOR) is now kaput.
The remaining LIBOR settings were published for the final time on Monday, and the benchmark has now been terminated permanently.
The end of LIBOR represents the culmination of a reform to financial benchmarks that began in the wake of a market scandal, which exposed widespread efforts among some of the world’s largest financial firms to manipulate the benchmark — typically to benefit their derivatives trading positions.
“The transition away from LIBOR, once referenced in an estimated US$400 trillion of financial contracts, has made financial markets safer, more stable and fit for modern use,” said the U.K.’s Financial Conduct Authority (FCA), the Bank of England and a working group on benchmark reform, in a joint statement on Tuesday.
While many of the LIBOR settings had already been retired, policymakers adopted certain synthetic U.S.-dollar LIBOR settings as a temporary measure to give firms enough time to move outstanding legacy contracts toward alternative benchmarks.
“The end of LIBOR is the epitome of a quiet regulatory success, of huge and complex risks unwound diligently over time, including during periods of unprecedented market turbulence,” said Nikhil Rathi, CEO of the FCA. “The transition away from LIBOR is one of the most significant events in markets in this generation.”
Looking ahead, the regulators stressed that credit-sensitive rates shouldn’t be adopted as alternatives to LIBOR, as they believe “these rates are not robust or suitable for widespread use as a benchmark.”
Specifically, they warned that U.S.-dollar credit-sensitive rates “have the potential to reintroduce many of the financial stability risks associated with LIBOR.”
Instead, market players should continue using the alternatives that have been developed to replace LIBOR, such as SONIA for British pounds and SOFR for U.S. dollars, the regulators said.
With the official end of the LIBOR, the working group is also being wound down, effective Tuesday.