How are LIBOR and EURIBOR Calculated?

The London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”) are benchmark reference rates fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.

LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling over the counter (“OTC”) interest rate derivatives contracts and exchange traded interest rate contracts.

LIBOR and EURIBOR are used to determine payments made under both OTC interest rate derivatives contracts and exchange traded interest rate contracts by a wide range of counterparties including small businesses, large financial institutions and public authorities.  Benchmark reference rates such as LIBOR and EURIBOR also affect payments made under a wide range of other contracts including loans and mortgages.

LIBOR is published on behalf of  the British Bankers’ Association (“BBA”) and EURIBOR is published on behalf of the European Banking Federation (“EBF”).

LIBOR (in each relevant currency) and EURIBOR are set by reference to the assessment of the interbank market made by a number of banks.  Those banks are selected by the BBA and EBF and each bank contributes rate submissions each day.

These submissions are not averages of the relevant banks’ transacted rates on a given day.  Rather, both LIBOR and EURIBOR require contributing banks to exercise their subjective judgement in evaluating the rates at which money may be available in the interbank market in determining their submissions.

Both LIBOR and EURIBOR have definitions, which set out the nature of the judgement required from the contributing banks in determining their submissions:

1. Since 1998, the LIBOR definition published by the BBA has been as follows: “The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size just prior to 11:00 London time”;
2. EURIBOR is defined by the EBF as “The rate at which euro interbank term deposits are being offered within the EMU zone by one prime bank to another at 11:00 am Brussels time.”

The definitions are therefore different; LIBOR focusing on the contributor bank itself and EURIBOR making reference to a hypothetical prime bank.  However each definition requires submissions related to funding from the contributing banks.  The definitions do not allow for consideration of factors unrelated to borrowing or lending in the interbank market.

The LIBOR and EURIBOR definitions are published and available to all participants in both UK and international financial markets.

Source: Information extracted from Financial Services Authority’s Final Notice to Barclay’s bank for Libor Scandal.