SWESTR – the Riksbank's response to STIBOR’s shortcomings

“It is time for financial market participants in Sweden to begin the transition from STIBOR, the traditional reference rate in Swedish kronor, to the Riksbank's transaction-based reference rate SWESTR. The Riksbank intends to be active in and support this process.” These were the words of Martin Flodén when he spoke today at the Kommuninvest Finance Forum. The Riksbank introduced SWESTR at the beginning of September this year and from tomorrow, 1 October, the Riksbank will also begin to publish compounded average rates and indices for Swestr.

Date: 30/09/2021 14:00

Speaker: Deputy Governor Martin Flodén

Place: Digital

Reference interest rates play a useful role in society

Reference rates are used worldwide in a variety of contracts. They work as benchmarks in the pricing of financial contracts. The intention of these benchmarks is that pricing shall follow market developments, and that none of the contracting parties shall be able to manipulate the benchmark. “The reference interest rates are thus a common tool that exists to make it easier for all who participate in or are affected by the financial market,” Martin Flodén noted.

Interbank rates have been used as reference rates since the 1980s

In Sweden, we have STIBOR (Stockholm Interbank Offered Rate) for contracts in Swedish kronor. The intention is that these rates should reflect the interest rates used for unsecured loans between banks at different maturities.

Today, when banks no longer use interbank loans for their funding as often as before, interest rates are in many cases based on judgement instead. This has led to diminishing confidence in interbank rates. The judgements also leave scope for manipulation. The most striking example of this is the so-called LIBOR Scandal in 2012, when it was discovered that several panel banks had manipulated submissions for their own gain.

Transaction-based reference rates should replace the old interbank rates

Central banks around the world have now taken the initiative to calculate and publish new, fully transaction-based, reference rates at the shortest term, thus leaving the system of reference rates that have become so widely based on judgement.

Therefore, the Riksbank has also undertaken to calculate and publish a fully transaction-based reference rate – SWESTR.

The Riksbank calculates SWESTR based on transactions in Swedish kronor that are made in the money market from one business day to the next (overnight, O/N). SWESTR thus aims to reflect the current rate in the overnight market. The test period for SWESTR ended at the beginning of September, and it can now be used in financial contracts.

So market participants can now start a transition to SWESTR, which we strongly encourage. "We know that it will take time and present challenges, particularly when it comes to longer maturities, but the aim is that the new reference rates will eventually be able to replace interbank rates even in longer-term contracts," Martin Flodén concluded.


Updated 30/09/2021