How Is Libor Calculated? - Your Stock Guide

The London Interbank Offered Rate or LIBOR is actually a set of several benchmarks that reflect the average interest rate at which large global banks can borrow from each other. The leading indicator used to price loans and other debt instruments, it is produced once a day by the Intercontinental Exchange (ICE) and regulated by the Financial Conduct Authority.

Key Takeaways

The London Interbank Offered Rate (LIBOR) is meant to reflect the average interest rate major banks charge each other to borrow.
LIBOR is produced once each day, although there are 35 different LIBOR rates posted—which includes seven different maturities across five maturities.
Each morning around 7 a.m. Eastern Standard Time, the ICE Benchmark Administration (IBA) asks a panel of contributor banks to answer the following question—“At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m. London time?”
Only banks that have a significant presence in the London market are considered for membership on the ICE LIBOR panel, which is determined annually.

There are a total of 35 LIBOR rates posted each day; interest rates are compiled for loans with seven different maturities (or due dates) for each of 5 major currencies, including the Swiss franc, the euro, the pound sterling, the Japanese yen, and the U.S. dollar.

Each morning, just before 11 a.m. Greenwich Mean Time, the ICE Benchmark Administration (IBA) asks a panel of contributor banks (usually 11 to 16 large, international banks) to answer the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m. London time?”

LIBOR Calculation

Only banks that have a significant presence in the London market are considered for membership on the ICE LIBOR panel, which is determined annually. For example, the U.S. dollar LIBOR includes major banks in the U.S., such as JPMorgan Chase (JPM), Bank of America (BAC), and Citibank (C).

The banks confidentially send their answers for each of the loan maturities, ranging from overnight to one year – annualized interest rates for unsecured funding for a specified period and specified currency. The IBA calculates the LIBOR rate using a trimmed mean,throwing out figures in the highest and lowest quartile and averaging the remaining numbers.

LIBOR Publication

Entities that have purchased a license from IBA publish the resulting Libor rates, as well as all the contributing rates that the banks provide, around 11:55 a.m. each day. The British Bankers Association once stated that these numbers appear on over one million trading screens around the world and in a wide variety of news sources. Any loans that are tied to one of the Libor indices—for example, a three-month U.S. dollar rate—will change in lockstep with the new figures.

After the revelation of a price-manipulation scandal in 2012, the terms and administration of LIBOR changed; it’s now officially known as ICE LIBOR.

This article was originally published by Investopedia.com. Read the original article here.