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London InterBank Offered Rate (LIBOR)

Candlefocus Editor
The London InterBank Offered Rate (LIBOR) is a benchmark rate used to set the interest rates of a variety of financial products and transactions, particularly those involving banks and other financial institutions. LIBOR is calculated through the Waterfall Methodology, which involves asking some of the world’s largest banks how much they charge one another for borrowing funds on a short-term basis. This information is then used to calculate LIBOR, which is published and updated daily.

LIBOR is used in various areas of finance, including corporate finance, debt, credit and investment banking, mortgage loans, derivatives, and other financial products. Due to its widespread use, LIBOR rates can have a significant impact on global financial markets. This means that changes in LIBOR, whether intentional or not, can have far-reaching effects.

Unfortunately, LIBOR has been subject to manipulation, scandal, and methodological critique in recent years, which has decreased its credibility as a benchmark rate. As a result, the Financial Conduct Authority has announced its intent to phase out LIBOR use beginning after 2021 and replace it with the Secured Overnight Financing Rate (SOFR) on June 30th, 2023. This is expected to bring new stability to global financial markets.

In summary, LIBOR is a benchmark rate used to set the interest rates of a variety of financial products and transactions, particularly those involving banks and other financial institutions. It has been subject to manipulation, scandal and methodological critique, leading to its eventual phase-out, which will be replaced by SOFR in 2023.

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