Tag Archives: LIBOR

The End of LIBOR

The FCA has announced the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. This is an important step towards the end of LIBOR, and the Bank of England and FCA urge market participants to continue to take the necessary action to ensure they are ready.

The FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

  • immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
  • immediately after 30 June 2023, in the case of the remaining US dollar settings

Based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out above. Representative LIBOR rates will not, however, be available beyond the dates set out above. Publication of most of the LIBOR settings will cease immediately after these dates. As ISDA has confirmed separately, the ‘spread adjustments’ to be used in its IBOR fallbacks will be fixed today as a result of the FCA’s announcement, providing clarity on the future terms of the many derivative contracts which now incorporate these fallbacks. 

The Bank of England and the FCA have made it clear over a number of years that the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it. Accordingly, both have worked closely with market participants and regulatory authorities around the world to ensure that robust alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.

Market-led working groups and official sector bodies, including the Financial Stability Board, have set out clear timelines to help market participants plan a smooth transition in advance of LIBOR ceasing. Today’s announcements confirm the importance of those preparations for all users of LIBOR. Regulated firms should expect further engagement from their supervisors at both the Prudential Regulation Authority and the FCA to ensure these timelines are met.

Authorities have also recognised that there are some existing contracts which are particularly difficult to amend ahead of the LIBOR panels ceasing, often known as the ‘tough legacy’. The FCA is taking steps to help reduce disruption in these cases. The FCA will consult in Q2 on using proposed new powers that the government is legislating to grant to it under the Benchmarks Regulation (BMR) to require continued publication on a ‘synthetic’ basis for some sterling LIBOR settings and, for 1 additional year, some Japanese yen LIBOR settings. It will also continue to consider the case for using these powers for some US dollar LIBOR settings. Any ‘synthetic’ LIBOR will no longer be representative for the purposes of the BMR and is not for use in new contracts. It is intended for use in tough legacy contracts only. The FCA will also consult in Q2 on which legacy contracts will be permitted to use any ‘synthetic’ rate.

The FCA has also published today statements of policy in relation to some of these proposed new BMR powers. These statements of policy confirm its policy approach, explain its plans set out above and its intention to propose using, as a methodology for any ‘synthetic rate’, a forward-looking term rate version of the relevant risk-free rate plus a fixed spread aligned with the spreads in ISDA’s IBOR fallbacks.

FCA CEO Nikhil Rathi said:

‘Today’s announcements provide certainty on when the LIBOR panels will end. Publication of most of the LIBOR benchmarks will cease at the same time as the panels end. Market participants must now complete their transition plans.’

Bank of England Governor Andrew Bailey said:

‘Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system. With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.’

The final countdown: completing sterling LIBOR transition by end-2021

After many years of preparation, 2021 is the critical year for firms to complete their transition away from LIBOR.

The LIBOR administrator, ICE Benchmark Administration, is consultingOpens in a new window on ceasing publication of all sterling LIBOR settings at the end of 2021, leaving just one year for firms to remove their remaining reliance on these benchmarks.

This issue touches numerous parts of the economy. LIBOR has been embedded in the financial system for many years, used to calculate interest in everything from corporate borrowing and intra-group transfers, to complex derivatives. It is also utilised in accounting practices, system infrastructure and other supporting functions. All of these will need to be ready to use alternative reference rates, such as SONIA, by the end of this year.

The Bank of England and the Financial Conduct Authority (FCA) have set out clear expectations for regulated firms to remove their reliance on LIBOR in all new business and in legacy contracts, where feasible. The primary way for market participants to have certainty over the economic terms of their contracts is to actively transition them away from LIBOR.

In support of this, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) has published an update to its priorities and roadmapOpens in a new window for the final year of transition to help businesses to finish planning the steps they will need to take in the coming months.

The Working Group’s top priority is for markets and their users to be fully prepared for the end of sterling LIBOR by the end of 2021. In particular the Working Group has recommended that, from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021. All businesses with existing loans in sterling should already have heard from their lenders about the transition, and those seeking a new or refinanced loan today should be offered a non-LIBOR alternative. Throughout the remainder of the year, existing contracts linked to sterling LIBOR should be actively transitioned where possible.

In addition, the Working Group has recommended that firms no longer initiate new linear derivatives linked to sterling LIBOR after the end of March 2021, other than for risk management of existing positions or where they mature before the end of 2021.

The Working Group, the Bank of England, and the FCA have made clear that, in future, they anticipate that the large majority of sterling markets will be based on SONIA compounded in arrears, to provide the most robust foundation for the overall market structure. However, in certain specific parts of the market, participants may need access to alternative rates. In this context, the Working Group welcomes the development of term SONIA reference rates (TSRRs) which are beginning to be made available by various providers. Alongside this, the Working Group has engaged closely with the FICC Markets Standards Board (FMSB) to support development of a market standard for appropriately limited use of TSRRs, consistent with the Working Group’s objectives and existing recommendations on use cases of benchmark ratesOpens in a new window. The proposed FMSB standard is under review by key stakeholders during January and is expected to be released for public comment in February.

The Bank of England and the FCA continue to work closely with firms to secure a smooth transition. In particular, supervisors of regulated firms will continue to expect transition plans to be executed in line with industry-recommended timelines across sterling and other LIBOR currencies. Senior managers with responsibility for the transition should expect close supervisory engagement on how they are ensuring their firm’s progress relative to industry milestones.

Tushar Morzaria, Chair, Working Group on Sterling Risk-Free Reference Rates, commented: “In line with the Working Group’s milestones for Q3 2020, lenders should now be in a position to offer loans based on SONIA or other LIBOR alternatives. I encourage all end users to engage with their lenders and trade associations as early as possible to ensure a smooth transition.”

Andrew Hauser, Executive Director for Markets at the Bank of England commented: “As we move into the final year for sterling LIBOR transition, it is crucial that firms take action now to make certain they are prepared well in advance of the end of 2021.”

Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, commented: “The end-game for LIBOR is now increasingly clear. Firms should now have everything they need to shift new business to SONIA and to complete their plans for transition of legacy exposures. There is no longer any reason for delay.”


Ladder Option
An option somewhere between a Lookback (q.v.) and a European Option. A Ladder Call Option has one or more “Rungs” (price levels) above the initial spot level. The Call’s payoff equals the greater of a European Call’s payoff or the excess over Strike of the highest Rung that the underlying price reaches.
For example, suppose that the Underlying Price is 100 and a Ladder Call has a Strike at 105 and Rungs at 115 and the Underlying Price reaches 120 before Expiration, then falls back to 98, the Ladder Call pays 15 = 120 – 105. If the Underlying price never gets above 109, then falls back to 98, the Ladder Call expires worthless.125.

Ladder Periodic Cap
A Periodic Cap that depends not on LIBOR at the end of the previous period, but on the highest or lowest rung of the Ladder that LIBOR reached during that period. The Ladder is a predetermined set of LIBOR levels, such as 4.00%, 3.50%, 3.00%, etc. The Ladder can change from period to period. The Ladder Periodic Cap is a special case of the Lookback Periodic Cap

Ladder strategy
A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.

Payment of a financial obligation later than is expected or required, as in lead and lag. Also, the number of periods that an independent variable in a regression model is “held back” in order to predict the dependent variable.

Lag response of prepayments
There is typically a lag of about three months between the time the weighted average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment speed is observed.

The ratio of a change in the option price to a small change in the option volatility. It is the partial derivative of the option price with respect to the option volatility.

Last split
After a stock split, the number of shares distributed for each share held and the date of the distribution.

Last trading day
The final day under an exchange’s rules during which trading may take place in a particular futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery of underlying physical commodities or financial instruments, or by agreement for monetary settlement depending upon futures contract specifications.

Last-In-First-Out (LIFO)
A method of valuing inventory that uses the cost of the most recent item in inventory first.

Lead manager
The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.

Leading economic indicators
Economic series that tend to rise or fall in advance of the rest of the economy.

Long-term Equity AnticiPation Securities. Listed Call and Put Options on shares and indexes, with expirations out as much as two years. Ordinary listed Calls and Puts expire within nine months. LEAPS permit investors to express longer-term views, without buying the underlying instruments.

A long-term rental agreement, and a form of secured long-term debt.

Lease Rate
The payment per period stated in a lease contract.
To provide money temporarily on the condition that it or its equivalent will be returned, often with an interest fee.

In a normal market the bid is less than the ask, and the difference – the bid-ask spread – would be the market maker’s profit on a round trip in the stock. In a crossed market, the bid price exceeds the ask (offer) price. In an OTC market one market maker may show the best bid and another the best offer, and these may cross. A crossed market cannot last, in equilibrium.
A Low Exercise Price Option traded on the Australian Stock Exchange or SOFFEX (Switzerland).

An entity that leases an asset from another entity.

An entity that leases an asset to another entity.

Letter stock
Privately placed common stock, so-called because the SEC requires a letter from the purchaser stating that the stock is not intended for resale.

Level-coupon bond
Bond with a stream of coupon payments that are the same throughout the life of the bond.

The use of debt financing.

Leverage ratios
Measures of the relative contribution of stockholders and creditors, and of the firm’s ability to pay financing charges. Value of firm’s debt to the total value of the firm.

Leveraged beta
The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm’s capital structure.

Leveraged buyout (LBO)
A transaction used for taking a public corporation private financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.

Leveraged portfolio
A portfolio that includes risky assets purchased with funds borrowed.

A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.

Liability funding strategies
Investment strategies that select assets so that cash flows will equal or exceed the client’s obligations.

Liability swap
An interest rate swap used to alter the cash flow characteristics of an institution’s liabilities so as to provide a better match with its assets.

The London Interbank Offered Rate; the rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR. There are many different LIBOR tenors.

LIFO (Last-in-first-out)
The last-in-first-out inventory valuation methodology. A method of valuing inventory that uses the cost of the most recent item in inventory first.

Lifting a leg
Closing out one side of a long-short arbitrage before the other is closed.

Limit order
An order to buy a stock at or below a specified price or to sell a stock at or above a specified price. For instance, you could tell a broker “Buy me 100 shares of XYZ Corp at $8 or less” or to “sell 100 shares of XYZ at $10 or better.” The customer specifies a price and the order can be executed only if the market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.

Limit order book
A record of unexecuted limit orders that is maintained by the specialist. These orders are treated equally with other orders in terms of priority of execution.

Limitation on asset dispositions
A bond covenant that restricts in some way a firm’s ability to sell major assets.

Limitation on liens
A bond covenant that restricts in some way a firm’s ability to grant liens on its assets.

Limited liability
Limitation of possible loss to what has already been invested.

Limited partner
A partner who has limited legal liability for the obligations of the partnership.

Limited partnership
A partnership that includes one or more partners who have limited liability.

Limited-liability instrument
A security, such as a call option, in which the owner can only lose his initial investment.

Limited-tax general obligation bond
A general obligation bond that is limited as to revenue sources.

Indexed Principal Swaps, i.e., Amortizing Swaps, where amortization depends on the change in LIBOR (LIPS) or some Treasury yield (TRIPS).

Line of credit
An informal arrangement between a bank and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain.

Linear regression
A statistical technique for fitting a straight line to a set of data points.

Liquid asset
Asset that is easily and cheaply turned into cash – notably cash itself and short-term securities.

Liquid yield option note (LYON)
Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Liquidating dividend
Payment by a firm to its owners from capital rather than from earnings.

When a firm’s business is terminated, assets are sold, proceeds pay creditors and any leftovers are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related: buy in, evening up, offsetliquidity.

Liquidation value
Net amount that could be realized by selling the assets of a firm after paying the debt.

Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an insolvent firm’s assets and the repayment of its debts.

A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.

Liquidity diversification
Investing in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor.

Liquidity preference hypothesis
The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates.

Liquidity premium
Forward rate minus expected future short-term interest rate.

Liquidity ratios
Ratios that measure a firm’s ability to meet its short-term financial obligations on time.

Liquidity risk
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the “true value” of the asset and the likely price, less commissions.

Liquidity theory of the term structure
A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market’s expectations of future interest rates because they embody a liquidity premium.

Listed stocks
Stocks that are traded on an exchange.

Load fund
A mutual fund with shares sold at a price including a large sales charge — typically 4% to 8% of the net amount indicated. Some “no-load” funds have distribution fees permitted by article 12b-1 of the Investment Company Act; these are typically 0. 25%. A “true no-load” fund has neither a sales charge nor Freddie Mac program, the aggregation that the fund purchaser receives some investment advice or other service worthy of the charge.

Loan amortization schedule
The schedule for repaying the interest and principal on a loan.

Loan syndication
Group of banks sharing a loan.

Local expectations theory
A form of the pure expectations theory which suggests that the returns on bonds of different maturities will be the same over a short-term investment horizon.

Locked market
A market is locked if the bid = ask price. This can occur, for example, if the market is brokered and brokerage is paid by one side only, the initiator of the transaction.

With PAC bond CMO classes, the period before the PAC sinking fund becomes effective. With multifamily loans, the period of time during which prepayment is prohibited.

Lognormal distribution
A distribution where the logarithm of the variable follows a normal distribution. Lognormal distributions are used to describe returns calculated over periods of a year or more.

London International Financial Futures Exchange (LIFFE)
A London exchange where Eurodollar futures as well as futures-style options are traded.

One who has bought a contract(s) to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short.

Long bonds
Bonds with a long current maturity. The “long bond” is the 30-year U.S. government bond.

Long hedge
The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price. Related: Hedge, short hedge

Long position
An options position where a person has executed one or more option trades where the net result is that they are an “owner” or holder of options (i. e. the number of contracts bought exceeds the number of contracts sold).
Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be “Long the stock.”

Long straddle
A straddle in which a long position is taken in both a put and call option.

Long-term assets
Value of property, equipment and other capital assets minus the depreciation. This is an entry in the bookkeeping records of a company, usually on a “cost” basis and thus does not necessarily reflect the market value of the assets.

Long-term debt
An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.

Long-term debt/capitalization
Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity.

Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders’ equity.

Lookback Option
An option with a payoff based on the path of some risk factor from the option’s inception until its expiration. Examples of lookback options include a Call (Put) with (a) underlying price equal to the maximum (minimum) of the reference price during the option’s life, and a given strike, or (b) underlying price equal to the reference price at the option’s expiration, and strike equal to the minimum (maximum) of the reference price during the option’s life.

Low Exercise Price Option
An extremely deep in-the-money European Call Option traded on the ASX (q.v.) options market, with strike price between one and ten cents. Since the strike price is so low, the LEPO’s owner is extremely likely to exercise it, and it is roughly equivalent to a Forward Contract (q.v.) with a low price. The LEPO owner receives no dividends, but has nearly the same exposure to a move in the underlying stock price as if he owned a share. I.e., the LEPO’s delta is nearly unity. (Source: Australian Stock Exchange.)

Low price-earnings ratio effect
The tendency of portfolios of stocks with a low price-earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.

See also forex glossary


Euro Interbank Offered Rate. The Brussels-based European Banking Federation’s Euro-denominated counterpart to LIBOR. As of January, 1999, Euribor seems to be winning its battle for acceptance over the British Bankers Association’s Euro LIBOR (q.v.), but London still hopes to win the war for the financial business. On 1/7/99 LIFFE announced plans for new contracts, based on five- and ten-year Euribor swaps.

See also the economic calendar