The global financial industry transitioned from LIBOR to alternative risk-free rates (RFRs) following manipulation scandals and declining transaction volumes underlying LIBOR.
Why LIBOR Was Replaced
LIBOR was based on estimates from panel banks, not actual transactions. This made it susceptible to manipulation, as evidenced by the 2012 scandal. Additionally, the underlying interbank lending market shrank significantly after 2008.
The New Risk-Free Rates
Each major currency now has its own risk-free rate: SOFR (USD), SONIA (GBP), ESTR (EUR), TONA (JPY), and SARON (CHF). These rates are based on actual overnight transactions, making them more reliable and harder to manipulate.
Key Differences from LIBOR
Unlike LIBOR, which was forward-looking with term rates (1M, 3M, 6M), the new rates are overnight backward-looking rates. This requires different calculation methods for loans and derivatives.