A reference rate is a rate that determines pay-offs in a financial contract and that is outside the control of the parties to the contract. It is often some form of

LIBOR The London Inter-Bank Offered Rate (Libor ) was an interest rate average calculated from estimates submitted by the leading Bank, banks in London. Each bank estimated what it would be charged were it to borrow from other banks. It was the prim ...

rate, but it can take many forms, such as a

consumer price index A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption purposes by households. It is calculated as the weighted average price of a market basket of Goods, consumer goods and ...

, a house price index or an

unemployment rate Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is the proportion of people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work d ...

. Parties to the contract choose a reference rate that neither party has power to manipulate.

Examples of use

The most common use of reference rates is that of short-term interest rates such as LIBOR in

floating rate note Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like SOFR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant. Almost a ...

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

s, swaps, short-term interest rate

futures contract In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...

s, etc. The rates are calculated by an independent organisation, such as the British Bankers Association (BBA) as the average of the rates quoted by a large panel of banks, to ensure independence. Another example is that of swap reference rates for

constant maturity swap A constant maturity swap (CMS) is a swap that allows the purchaser to fix the duration of received flows on a swap. The floating leg of an interest rate swap typically resets against a published index. The floating leg of a constant maturity swap ...

s. The ISDAfix rates used are calculated daily for an independent organisation, the

International Swaps and Derivatives Association The International Swaps and Derivatives Association (ISDA ) is a trade organization of participants in the market for derivative (finance)#Over-the-counter derivatives, over-the-counter derivatives. It is headquartered in New York City, and has c ...

, from quotes from a large panel of banks. In the

credit derivative In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the ''credit risk''"The Economist ''Passing on the risks'' 2 November 1996 or the risk of an event of default of a corp ...

market a similar concept to reference rates is used. Pay offs are not determined by a ''rate'', but by possible ''events''. In this case, the ''reference event'' has to be a very precisely defined credit event, to make sure there can be no disagreement on whether the event has occurred or not.. Typically the benchmark LIBOR is the three-month rate.

Reference rates for short-term interest rates

Examples of reference rates for short-term interest rates are: *

- London Interbank Offered Rate. LIBOR was terminated in June 2023. *

SOFR Secured Overnight Financing Rate (SOFR) is a secured overnight rate, overnight interest rate. SOFR is a reference rate (that is, a rate used by parties in commercial contracts that is outside their direct control) established as an alternative to L ...

- Secured Overnight Financing Rate. SOFR is a reference rate established as an alternative to LIBOR. * Euribor - Euro Interbank Offered Rate * EONIA - Euro OverNight Index Average. EONIA was replaced by the Euro short-term rate (€STR) in 2019. * €STR - Euro short-term rate * TIBOR - Tokyo Interbank Offered Rate. Euroyen TIBOR will be terminated in 2024.JBA TIBOR Reform , JBA TIBOR
/ref> * TONAR - Tokyo Overnight Average Rate * SIBOR - Singapore Interbank Offered Rate * STIBOR - Stockholm Interbank Offered Rate * WIBOR - Warsaw Interbank Offered Rate * MIBOR - Mumbai Interbank Offered Rate * PRIBOR - Prague Interbank Offered Rate * BUBOR - Budapest Interbank Offered Rate * HIBOR - Hong Kong Interbank Offered Rate * SHIBOR - Shanghai Interbank Offered Rate * ISDAfix - International Swap Dealers Association Fix * TELBOR - Tel Aviv Interbank Offered Rate

References

{{Finance-stub Interest rates Reference rates