The Evolution of STIBOR

History of STIBOR

The Stockholm Interbank Offered Rate, STIBOR, was established 1986 by the leading banks operating in Sweden to serve as a reference rate for a select few loans and derivatives. The first financial contract referenced to STIBOR was issued in October 1987, a floating rate note tied to 3-month STIBOR. As the usage of floating rate loans became more common and the derivatives market grew over time STIBOR acquired an increasingly important role in the Swedish economy.

STIBOR was designated a critical benchmark on 17 October 2018 in accordance with EU Commission Implementing Regulation (EU) 2018/1557. The decision to designate STIBOR a critical benchmark was based on the assessment made by the Swedish FSA stating that STIBOR is used as a reference in the pricing of over-the counter (OTC) interest rate derivatives denominated in Swedish krona (SEK) for an outstanding notional amount of EUR 3,500 billion. Close to one fourth of SEK-denominated bonds reference STIBOR and STIBOR is used in the pricing of 75% of total loans to Swedish households and non-financial institutions. [Official Journal of the European Union – 18.10.2018]

As of 2022 STIBOR is determined with the Input Data contributed by a panel of credit institutions (Panel Banks) that are representative of the Swedish financial market. The rates for STIBOR are calculated as the arithmetic mean of input data contributed by the Panel Banks according to a clearly defined STIBOR calculation methodology.

The STIBOR calculation methodology, which had remained relatively unchanged for the past decades, went through an extensive analysis and revision in close collaboration with contributing banks, market expertise and the Supervisory Authority ahead of the revision. During a project spanning 19 months (2020-2022) SFBF developed a revised calculation methodology and a new calculation system to accommodate the revised calculation methodology in an automated and controlled manner to safeguard the integrity and robustness of the benchmark, based on actual transactions from contributing panel banks.

The Revised STIBOR

The The Swedish Financial Benchmark Facility (SFBF) assumed the administration of STIBOR in April 2020. At that time, SFBF was not listed on the ESMA Benchmarks Register, so work commenced to prepare SFBF, as administrator of STIBOR, to be authorised under BMR in accordance with Article 34.

During the initial preparations for authorisation SFBF undertook a review of the STIBOR definition and calculation methodology in the context of BMR and the Financial Stability Board’s desire that benchmarks be anchored in actual transactions to the greatest extent possible. A comprehensive review of STIBOR was launched in July 2020, with a view to ensuring that STIBOR accurately reflects the current underlying economic reality, meets best practice, and that it fully conforms to BMR.

The revised methodology continues to measure STIBOR’s underlying economic reality in a consistently accurate manner, aligned to the historical and intended use of the benchmark but in providing a more direct and transparent link to observable trade data the methodology is more robust, transparent and provides assurance to users and is designed to meet applicable regulatory requirements.

The project also contained the design and development of a bespoke calculation system to accommodate the revised calculation methodology in an automated and controlled manner to safeguard the integrity and robustness of the benchmark. The system is capable of complex calculations and identifying erroneous input and manipulation attempts in tandem with supervision from contributors and SFBF oversight functions.

The revised methodology measure STIBOR’s underlying economic reality in a consistently accurate manner, aligned to the historical and intended use of the benchmark but in providing a more direct and transparent link to observable trade data the methodology is more robust, transparent and provides assurance to users and is designed to meet applicable regulatory requirements.

What steps did the Evolution contain?

Making the revision to STIBOR was not taken lightly. There are a number of steps in the evolution process that need to take place. We have below outlined the steps taken during the Evolution of STIBOR project.

Steps completed ✔

Review of the methodology and definition with key stakeholders (complete)
Sampling of transactional data (complete)
Development of a revised methodology and definition that meets BMR standards (complete)
Public consultation to propose changes and seek feedback from stakeholders (complete)
Review, analyse and reply to feedback received on the public consultation (complete)
Finalise the revised methodology and definition (complete)
Development and testing of a bespoke calculation agent systems and processes to determine the benchmark according to the revised methodology (complete)
Launching the bespoke calculation agent system and integrate the contributing banks to make contributions via the system (complete)
Lodge an application for SFBF to receive an authorisation as an administrator per the BMR to the Swedish FSA (complete)
Undergo an authorisation process conducted by the Swedish FSA to recieve an authorisation as an administrator per the BMR (complete)
Achieve authorisation as an administrator per the BMR from the Swedish FSA and entry to the ESMA Benchmark Register (complete)

STIBOR has fully transitioned to a revised transaction based calculation methodology which, in an automated and controlled manner, calculates the contributing banks’ cost of fund using the banks eligible transactions. The revised methodology prioritises market transactions to the greatest extent possible and is composed of a three-level waterfall model (please see the STIBOR Calculation Methodology for further details). As STIBOR is an offered rate, a predetermined Bid to Offer Spread is added to the cost of funds to produce the STIBOR rates.

Why evolve STIBOR?

Over recent years banks participating in the Swedish markets have sourced their funding from foreign currency markets in addition to the Swedish market. Issuance of foreign currency CD’s and CP in currencies such as euro, British pounds and United States dollars have been widely used as a source of funding. Funds received in foreign currency can either be retained in the foreign currency to fund foreign currency liabilities or converted into Swedish krona if desired using the forward foreign exchange market. In reviewing the calculation methodology to ensure that transactions were used to the greatest extent possible the calculation methodology was revised to a waterfall methodology with actual transactions being provided directly to the SFBF as administrator to calculate a panel bank cost of funds. Actual transactions were further employed by the SFBF through the application of interpolation and extrapolation and the use of a Market Adjustment Factor to extend the usage of transactions for up to 5 days.

A key requirement of the Benchmark Regulation (EU BMR) is for benchmarks to be anchored in actual transactions and for the reduction of expert judgement by contributing banks to the greatest extent possible. The BMR requires all IBOR benchmarks to meet certain standards for the benefit of all users. This regulation, introduced in the wake of the LIBOR scandal, imposes obligations for benchmark administrators to meet. The level of obligations imposed is linked to the designation of the benchmark as to whether it is non-significant, significant or critical. In the case of STIBOR, it has been deemed critical, meaning that it has additional requirements to ensure its fitness for purpose.

BMR also introduces a requirement for all administrators of benchmarks to be regulated by a competent authority. In the case of STIBOR, the competent authority is the Swedish regulator, Finansinspektionen.

Analysis made ahead of revision

Pre-Live Data Analysis
SFBF collected sample transactional data from contributing banks over an extended period of time to analyse how transactional data can be utilised in any new methodology. SFBF conducted several data collection exercises with two main objectives: first, to provide the SFBF with a more accurate understanding of the impact of the new determination methodology on STIBOR’s value and volatility; second, to allow the accurate testing of the contribution and calculation infrastructure. Importantly, the results provided the necessary confidence to SFBF on the readiness of all Panel Banks to submit, on a daily basis, an accurate and timely account of their activity in the relevant segment of the money markets applied toward the daily calculation of STIBOR.

Public Consultation
When making any material revisions to a benchmark it is required by the administrator to seek feedback through a public consultation. The process formed part of SFBF’s commitment to evolve STIBOR, for the benefit of its broad user base, with the aim of ensuring the benchmark is fully transparent, robust and aligned to international standards.

In March 2021, SFBF published its Consultation Paper on the Evolution of STIBOR. In April 2021, an Analysis of Stakeholder Feedback was made available.