The Basics

bbalibor™

bbalibor stands for 'London InterBank Offered Rate'. It is produced for ten currencies with 15 maturities quoted for each - ranging from overnight to 12 months - thus producing 150 rates each business day.

bbalibor is a benchmark giving an indication of the average rate at which a leading bank can obtain unsecured funding in the London interbank market for a given period, in a given currency. It therefore represents the lowest real-world cost of unsecured funding in the London market.

Individual bbalibor rates are the end-product of a calculation based upon submissions from a bank panel, made up of the largest, most active banks in each currency bbalibor is quoted for.

Definition

Every contributor bank is asked to base their bbalibor submissions on the following question:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

Therefore, submissions are based upon the lowest perceived rate at which a bank could go into the London interbank money market and obtain funding in reasonable market size, for a given maturity and currency.   

bbalibor is not necessarily based on actual transactions, as not all banks will require funds in marketable size each day in each of the currencies/ maturities they quote and so it would not be feasible to create a suite of LIBOR rates if this was a requirement.  However, a bank will know what its credit and liquidity risk profile is from rates at which it has dealt and can construct a curve to predict accurately the correct rate for currencies or maturities in which it has not been active.

“Reasonable market size” is intentionally left broadly defined: it would have to be constantly monitored and in the current conditions would have to be changed very frequently. It would also vary between currencies and maturities, leading to a considerable amount of confusion.

The current definition was adopted as the standard after a review in 1998. Up until this point, submissions from panel members were based upon the following: “At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11am?”  The new definition enables accountability for the rates.

All bbalibor rates are quoted as an annualised interest rate. This is a market convention.  For example, if an overnight Sterling rate from a contributor bank is given as 2.00000%, this does not indicate that a contributing bank would expect to pay 2% interest on the value of an overnight loan.  Instead, it means that it would expect to pay 2% divided by 365.

What is bbalibor used for?

bbalibor is the primary benchmark for short term interest rates globally. It is written into standard derivative and loan documentation such as the ISDA terms, and is used for an increasing range of retail products such as mortgages and college loans. It is used as a barometer to measure strain in money markets and as a gauge of market expectation for future central bank interest rates.  It is also the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges.

Selection of Contributors

Contributor banks are selected for currency panels in line with three guiding principles: 

Every panel for the 10 bbalibor currencies, each ranging from 7 to 18 contributors, is chosen by the independent Foreign Exchange and Money Markets Committee (FX&MM Committee) in order to provide the best representation of activity within the London money market. bbalibor submissions from panel members will be on average the lowest interbank unsecured borrowing rates in the London interbank market.

Twice yearly the FX&MM Committee undertakes an assessment of each bbalibor panel, based on a review of the contributors by BBA LIBOR. The review evaluates each bank by ranking them according to their total cash and foreign exchange (FX) swap activity over two quarters and selecting the banks with the largest scale of activity, with due concern also given to criteria 2.) and 3.) above. The review is not limited to current contributors and any bank can submit themselves to the evaluation process for any currency by submitting the required market activity data.

Calculation of bbalibor

Thomson Reuters is the designated calculation agent for BBA LIBOR. Data submitted by panel banks into the bbalibor process is received and processed by Thomson Reuters and the data is calculated using guidelines provided by the FX&MM Committee.

Each cash desk in a LIBOR contributor bank has a Thomson Reuters application installed allowing that institution to confidentially submit rates. Each morning between 1100 and 1110 a named individual responsible for cash management at each panel bank formulates their own rates for the day and inputs them into this application, which links directly to a rate setting team at Thomson Reuters.  A bank cannot see other contributor rates during the submission window - this is only possible after final publication of the BBA LIBOR data. Thomson Reuters run a collection of automated and manual tests on the submitted rates before they are sent to the calculation engine, and after calculation the data is released to the market via Thomson Reuters and other licensed data vendors.

Every bbalibor rate produced by Thomson Reuters is calculated using a trimmed arithmetic mean. Once Thomson Reuters receive each contribution submission they rank them in descending order and then exclude the highest and lowest 25% of submissions - this is the trimming process. Details of this are shown in the table below. The remaining contributions are then arithmetically averaged to create a bbalibor quote. This is repeated for every currency and maturity, producing 150 rates every business day.

 

No. of Contributors	Trimming methodology	No. of Contributors on which BBA LIBOR rate is based
18 Contributors	top 4 highest rates, tail 4 lowest rates	10
17 Contributors	top 4 highest rates, tail 4 lowest rates	9
16 Contributors	top 4 highest rates, tail 4 lowest rates	8
15 Contributors	top 4 highest rates, tail 4 lowest rates	7
14 Contributors	top 3 highest rates, tail 3 lowest rates	8
13 Contributors	top 3 highest rates, tail 3 lowest rates	7
12 Contributors	top 3 highest rates, tail 3 lowest rates	6
11 Contributors	top 3 highest rates, tail 3 lowest rates	5
10 Contributors	top 2 highest rates, tail 2 lowest rates	6
9 Contributors	top 2 highest rates, tail 2 lowest rates	5
8 Contributors	top 2 highest rates, tail 2 lowest rates	4
7 Contributors	top highest rate, tail lowest rate	5

 

The decision to trim the bottom and top quartiles in the calculation was taken to exclude outliers from the final calculation. By doing this, it is out of the control of any individual panel contributor to influence the calculation and affect the bbalibor quote.

Inception of bbalibor

bbalibor was first developed in the 1980s as demand grew for an accurate measure of the real rate at which banks could borrow money from each other. This became increasingly important as London's status grew as an international financial centre. More than 20 per cent of all international bank lending and more than 30 per cent of all foreign exchange transactions now take place in London.

In 1984 UK banks asked the BBA to develop a calculation that could be used as an impartial basis for calculating interest on syndicated loans.  This led to the creation of “BBAIRS” – the BBA Interest Rate Settlement in 1985, which in 1986 became bbalibor.  The objectivity and accuracy of the rates allowed derivatives to be created based on the data as a reference, and is now widely used in the City of London and worldwide.