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The IBOR Reform : A study on the basis spread between ARR and IBOR

Köllmann, S.V.H. (2020) The IBOR Reform : A study on the basis spread between ARR and IBOR.

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Abstract:Interbank Offered Rates (IBOR) have served as the go-to risk-free rate in the financial sector for decades. After the need emerged to transition to a more transparent rate, fully based on actual transactions, this has led to the introduction of Alternative Reference Rates (ARR) as a replacement for the IBOR. This research aims to analyse the structural differences between the IBOR and ARR for the Sterling, Dollar and Euro. We analyse the basis spread, which is defined as the difference between the overnight zero rates of the ARR and the IBOR, to determine which challenges are encountered by the structural differences. We conclude that major transition challenges are caused by structural differences between the IBOR and ARR. We have identified that the major challenges are recalibration of models, renegotiation of existing contracts, dispute resolution between parties due to a different interpretation of spreads and the need for new accounting guidance due to differences in value, behaviour and stability of the value of the ARRs. These challenges need to be addressed as soon as possible and more (global) guidance is needed to make sure the transition is completed before the possible discontinuation of the IBOR in Q4 2021.
Item Type:Essay (Master)
Clients:
EY, Amsterdam, Netherlands
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/80854
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