LIBOR is the London Interbank Offered Rate. It is a daily reference rate that is based on the interest rates on unsecured funds that are borrowed by banks from other banks in the London wholesale money market. The money market in London is also referred to as the interbank market.
It came into being because in 1984, many banks were trading using a variety of different methods, most notably foreign currency options, forward rate agreements and interest rate swaps. The use of these methods brought a lot of business to the London Interbank market, but it was felt that there needed to be a standard or some uniformity to continue the growth that had started. Then the British Bankers’ Association worked together with several other entities including the Bank of England, which resulted in the establishment of BBAIRS terms. BBAIRS stands for the British Bankers’ Association Interest Rates and Currency Swaps. This is the British Banker’s Association’s standard for interest swap rates. Fixing the BBA interest settlement rates was part of the standard that was implemented. From September 2, 1985, the BBAIRS terms became the standard practice for the wholesale money market. However, the BBA LIBOR fixings did not actually “officially” commence before January 1, 1986. There were, of course, some rates that were fixed during a trial period that began in December 1984.
Member banks of the British Bankers’ Association come from all over the world. There are more 200 members and they are from 60 countries. There are an additional 60 countries represented from associated professional firms.