Libor - Scope

Scope

The Libor is widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There are three major classifications of interest rate fixings instruments, including standard interbank products, commercial field products, and hybrid products which often use the Libor as their reference rate.

Standard interbank products:

• Forward rate agreements
• Interest rate futures, e.g. Eurodollar futures
• Interest rate swaps
• Swaptions
• Overnight indexed swaps
• Interest rate options, Interest rate cap and floor

In the United States in 2008, around 60 percent of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the US dollar Libor. In 2012, around 45 percent of prime adjustable rate mortgages and more than 80 percent of subprime mortgages were indexed to the Libor. American municipalities also borrowed around 75 percent of their money through financial products that were linked to the Libor. In the UK, the three-month British pound Libor is used for some mortgages—especially for those with adverse credit history. The Swiss franc Libor is also used by the Swiss National Bank as their reference rate for monetary policy.

The usual reference rate for euro denominated interest rate products, however, is the Euribor compiled by the European Banking Federation from a larger bank panel. A euro Libor does exist, but mainly, for continuity purposes in swap contracts dating back to pre-EMU times. The Libor is an estimate and is not intended in the binding contracts of a company. It is, however, specifically mentioned as a reference rate in the market standard International Swaps and Derivatives Association documentation, which are used by parties wishing to transact in over-the-counter interest rate derivatives.