IBOR to Alternative Reference Rates

From 29 November 2021, we will stop using Interbank Offered Rates in our financing rate calculation and will instead use Alternative Reference Rates.

What are IBOR rates?

Interbank offered rates (IBORs) are interest rate benchmarks used for a broad range of financial products and contracts.

The majority of IBOR rates will cease to exist by the end of 2021. This means all benchmarks falling under the IBOR umbrella, including the prominent London Interbank Offered Rate (LIBOR), will be phased out and replaced by alternative rates.

What is LIBOR?

Since the 1980s, LIBOR was viewed as the benchmark interbank lending rate used to calculate the rate at which banks would offer short-term loans to each other. Until the 2008 financial crisis, LIBOR was seen as the gold standard for measuring the health of the entire global financial system.

Why the rates are changing

Regulators have expressed concerns about the reliability and sustainability of IBORs. Stringent liquidity rules brought on by the 2008 financial crisis, coupled with LIBOR’s loss of credibility due to scandals and its part in the crisis, saw IBORs becoming less attractive for short-term, unsecured interbank lending. This led to a significant decline in the interbank unsecured funding markets in the last decade, as well as a lack of liquidity - leading to a market which is not adequately representative. This prompted regulators to shift their preference towards Alternative Reference Rates (ARRs).

What the rates are switching to

IBOR users will be switching to Alternative Reference Rates (ARRs). ARRs are based on actual overnight interest rates in liquid wholesale cash and derivative markets. This makes ARRs more robust and less volatile than IBORs.

Since ARRs are risk-free rates, they don’t incorporate the credit risk that is inherent in the calculation of IBORs, which are based on interbank lending over longer time periods.

How will this change affect me?

If you hold an index position at the end of the trading day (5pm ET), the position is considered to be held overnight and subject to either a financing charge or credit to reflect the cost of funding your position (in relation to the margin utilised).

On an index, this is calculated as:

Daily financing charge or credit = value of position* x applicable funding rate/365**

The applicable funding rate in this example will change from an Interbank Offer Rate (IBOR) to Alternative Reference Rate (ARR). For example, on the US Wall St 30, your applicable funding rate would change from USD LIBOR - 3 month to SOFR (Secured Overnight Financing Rate).

The table below shows what each index product uses currently as its applicable funding rate and which Alternative Reference Rate we will be using starting from 29 November 2021.
Index Old Interbank funding rate Alternative Reference Rate
Australia 200 Australia Bank Bill - 3 months AONIA
China A50 USD LIBOR - 1 month SOFR
Germany 30 EURIBOR - 3 months ESTR
Europe 50 EURIBOR - 3 months ESTR
France 40 EURIBOR - 1 month ESTR
Hong Kong 33 HKD HIBOR - 1 month HONIA
India 50 USD LIBOR - 1 month SOFR
Japan 225 USD LIBOR - 3 month SOFR
US Nas 100 USD LIBOR - 3 month SOFR
Netherlands 25 EURIBOR - 1 month ESTR
Singapore 30 SGD SIBOR - 1 month SORA
US SPX 500 USD LIBOR - 3 month SOFR
Taiwan Index USD LIBOR - 1 month SOFR
UK 100 GBP LIBOR - 3 month SONIA
US Russell 2000 USD LIBOR - 3 month SOFR
US Wall St 30 USD LIBOR - 3 month SOFR

*where value of position = size of position x price at the end of the trading day (5pm ET).

**For long indices positions, applicable funding rates are admin fee of 2.5% plus relevant alternative rate, annualised. Represented by a negative rate, and hence a charge.

For short indices positions, when the relevant alternative rate is greater than our 2.5% admin fee, the rate used will be the difference between the two, annualised. This is represented by a positive rate, and therefore a credit.
When the relevant alternative rate is lower than our 2.5% admin fee, the rate used will be the difference between the two, annualised. This is represented by a negative rate, and therefore a charge See our financing costs page to know more about our applicable funding rates.