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LIBOR has been the most important figure in the financial systems for almost three decades. As a reference interest rate in mid-2020 linked derivatives amounted to more than USD 600 trillion worth of financial contracts. Since the disclosure of the scandal, its cessation is due with last rates published until June 2023. The crucial benchmark regimes will shift to risk-free overnight rates based on transactions.
This work provides a current analysis of the effects of the scandal and the transition process on the financial industry. It includes the incentive factors leading to the scandal and determining decisions in the ongoing process. Participants were tempted to conduct manipulatively. A design-lack in LIBOR submissions, a moral hazard dilemma, remuneration schemes, and imperfect administrative governance are core reasons for the scandal. As a consequence, new regulative requirements such as the IOSCO principles were established. These requirements, analyzed in this work, are to be fulfilled by the new RFR-based benchmark regime. New models based on the former require efforts to establish sufficient benchmarks. In many cases markets’ acceptance is anticipated. Complexity and challenges lie within the transition from one to the other system. This is reflected in the scope and length of the transition process in terms of consultations and publications.
This work provides current insight into the transition selected proposed approaches. Further research could evaluate the particular valuation issues/approaches of the transition and/or the varying proposals concerning a forward-looking approach based on RFRs. Besides, effects on emerging markets and other jurisdictions dependent on the crucial benchmarks provide related fields of research.