Let's look at the fixing mechanism of the different benchmark rates, starting with interbank offered rates or IBORs such as LIBOR and EURIBOR. Historically, they've been based on surveys of leading banks where banks reported the rates they had to pay or would have to pay on various borrowings across different currencies and timeframes following the LIBORscandal, in the late 2000s, reforms were introduced to improve transparency and reliability.

One key reform was the move to a waterfall methodology, which prioritizes the use of actual transaction data when available to calculate benchmark rates. If there are insufficient transactions to represent the market, the rate is then derived from other market data, and if no reliable data is available, expert judgment is used to determine the rates. Despite these reforms, LIBOR was officially phased out, and the final US dollar LIBOR rates were published in June, 2023. LIBOR no longer exists as a benchmark due to its susceptibility to manipulation and reliance on subjective estimates. However, other IBORs such as EURIBOR remain in use, particularly for Euro denominated loans, mortgages, and derivatives in the Eurozone.

But why were LIBOR rates phased out while EURIBOR is still in use? Well, in the Eurozone, banks regularly lend and borrow from one another forming a large portion of the money market. These loans are typically unsecured, meaning they're based on the perceived credit worthiness of the borrower. The interbank market for loans of different maturities, e.g. one month, three months, six months, is robust, providing sufficient transactional data to support the calculation of EURIBOR. Moreover, EURIBOR has been able to adapt and continue functioning because it complies with the benchmark regulation or BMR introduced by the European Union to ensure that benchmarks like EURIBOR are transparent representative and based on real transactions. The BMR established rigorous standards for benchmark administrators to ensure integrity further supporting the continued use of EURIBOR for Euro denominated products. In the case of other LIBOR currencies, interbank term lending became less frequent due to regulatory and liquidity changes after the 2008 financial crisis. As a result, LIBOR rates were phased out and the focus shifted towards secured lending markets like repos and risk-free Benchmarks like SOFR for US dollar and SONIA for GB pounds, which reflects overnight borrowing rates.

The Euro market also introduced a risk-free rate, or RFR, known as ESTR, or Euro short-term rate, which is based on overnight borrowing costs in the Eurozone. While EURIBOR remains widely used, there is potential for a long-term transition towards ESTR. Similar to how markets in the US dollar and GB pound transition towards SOFR and SONIA, this shift may come as regulatory and market participants focus on reducing reliance on unsecured lending rates like EURIBOR, in favor of more transparent and risk-free alternatives.