Learning to live without LIBOR

A RESTAURANT CHAIN in Huntsville, Alabama, draws an extra few thousand dollars from its working-capital facility with a local bank. Meanwhile, its employees’ pension scheme needs to convert the variable interest rate on $10bn of its assets into a fixed revenue stream. The scheme agrees to an interest-rate swap with a hedge fund, which wants to bet on the Federal Reserve raising rates. It places the wager using a margin loan from its prime broker, one of Wall Street’s larger banks.

Each transaction needs a benchmark to decide what interest rate should be charged. The bizarre thing is that they all use the same one: the London interbank offered rate (LIBOR), an estimate of the rate at which big banks in London lend to each other in an obscure corner of the money markets. Every day, it gives borrowing costs for each of five currencies, for periods ranging from overnight to a year. Those for the dollar alone are used to determine the interest rates on $223trn of debt and derivatives—more than two-and-a-half times annual global GDP. But the benchmark is not long for this world. Fixings for the euro, sterling, Swiss franc and yen will be discontinued at the end of 2021, and those for the dollar in June 2023. What will replace them?