There was a time when LIBOR, the London Interbank Offered Rate, was an acronym with which few outside the world of finance were familiar. But the manipulation of the reference rate led to a public debate over LIBOR’s future that has now dragged on for six years. Irrespective of all the fines imposed, it has become quite clear that there is no future for LIBOR, and the rate will be phased out in 2021.
The bottom line is that estimates provided by a small number of banks are no longer adequate. Over the past few years national working groups across the world have implemented improvements or developed new benchmark interest rates, as is the case in Switzerland. What the new reference rates have in common is that they are overnight rates based on transactions as opposed to estimates. In less than two years, support for LIBOR will be removed and banks will have to switch contracts, products, systems and processes based on the rate to new, alternative reference rates (ARR). The complexity of migrating to ARR should not be underestimated. Since 2009, SIX has provided a robust alternative to the “CHF LIBOR” rate in the shape of SARON, the Swiss Average Rate Over Night. The five key differences are as follows:
1. Money Market
SIX operates the fully automated trading platform (SIX Repo) for the secured money market (shortterm credit funding) in Switzerland. The SARON reference rate reflects this repo market. “Funding against collateral” is the rule here.
The LIBOR reference rate reflects the unsecured money market (short-term credit funding). “Funding against creditworthiness” is the rule here (no collateral required).
Some 160 banks and insurance companies take part in the Swiss repo market, including the Swiss National Bank (SNB), which uses it to supply Switzerland’s economy with liquidity.
A group of 11 to 16 panel banks is involved in setting LIBOR.
Banks receive funds from the SNB by depositing securities as collateral. They pledge to buy back those securities at a later date and pay interest. Banks also borrow money from each other using this principle (secured interbank market).
The panel banks answer the question of what interest rate they could borrow funds at if they ask for an interbank offer in a reasonable market size. Illicit collusion between some of those panel banks caused the LIBOR scandal in 2011.
4. Values & Calculation
Actual concluded transactions and quotes flow into the calculation of SARON. That’s approximately 110 interest rates per day on an annual average.
The estimates submitted by the panel banks flow into the calculation of LIBOR. Between 5 and 8 interest rates are used, depending on the number of banks involved. The 3 to 4 highest and lowest interest rates are discarded.
- Calculated/published every ten minutes
- Fixing conducted three times a day (closing rate: 6:00 pm)
- Available in one currency (CHF)
- Calculated once a day
- Published once a day
- Available in five currencies (CHF, EUR, GBP, JPY, USD)
In his role as Head Index, Christian Bahr is responsible for the entire index business and the related services at SIX. He also chairs the index commissions. He has broad-based expertise in passive investments and indices as well as many years of experience in the markets data business. He was responsible for product development, engineering and index management in his previous roles at STOXX (Deutsche Börse) and the Dow Jones Indexes.