Interest Rate Benchmark Types: IBOR vs. RFR
Table of Contents
Summary
Every Projection Curve in a curve family references one underlying floating-rate benchmark, and every such benchmark falls into one of two categories: IBOR (term rates, historically set by panel-bank submission, embedding bank credit and liquidity risk — EURIBOR, historically LIBOR) or RFR (overnight, transaction-based, near risk-free — SOFR, ESTR, SONIA). This is a classification of benchmark type, not a grouping construct: "IBOR curves" is shorthand for "the Projection Curves in a family whose index happens to be IBOR-type", the same discrete label described in Funding and Projection Curves. The distinction matters because it is the credit/liquidity risk embedded in IBOR — absent from RFRs — that produced the LIBOR-OIS basis behind multi-curve construction in the first place.
Detail
IBOR: term, panel-submitted rates
An IBOR (Interbank Offered Rate) is a term rate — quoted for a fixed forward-looking period (1M, 3M, 6M, 12M) — historically set by a panel of banks submitting the rate at which they believe they could borrow unsecured from one another. Because it is unsecured interbank lending, an IBOR embeds:
- Credit risk: the possibility a panel bank could default within the quoted term.
- Liquidity risk: the term nature means cash is committed, not available overnight.
EURIBOR remains an active IBOR-type benchmark. LIBOR was the archetypal example before its post-2008 credibility problems and eventual cessation drove the transition to RFRs described below.
RFR: overnight, transaction-based rates
A Risk-Free Rate (RFR — the industry term, despite not being literally risk-free) is set from actual overnight transactions rather than panel submissions, and carries negligible credit/liquidity risk because it is typically secured (repo-based, e.g. SOFR) or reflects genuinely overnight unsecured interbank lending with minimal term risk (e.g. SONIA, ESTR). RFRs have no native term structure of their own — a "3M SOFR" quote either compounds realised daily SOFR fixings over the period in arrears, or comes from a separately-constructed forward-looking term rate derived from SOFR futures, rather than being submitted directly the way 3M LIBOR was.
Why the distinction forced multi-curve construction
Discounting collateralised trades at an IBOR curve became a mispricing once the LIBOR-OIS basis widened materially — an IBOR curve reflects bank credit and liquidity risk that a collateralised (near risk-free) trade does not carry. That is precisely the split Multi-Curve Construction documents: the Funding Curve is always RFR/OIS-based (near risk-free, appropriate for discounting collateralised cash flows), while Projection Curves may be either IBOR-type (where the index is still actively quoted, e.g. EURIBOR) or RFR-type (post-LIBOR-transition currencies, where the "projection" curve and the discounting curve share the same underlying risk-free rate family but are still built and quoted separately per tenor/compounding convention).
Both categories are still discrete curve identities
Within one currency's curve family, IBOR-type and RFR-type Projection Curves sit side by side as ordinary members of the same discrete, enumerable set of curve identities — EURIBOR-3M and EURIBOR-6M are IBOR-type; a compounded-SOFR curve is RFR-type. The IBOR/RFR label is an attribute of a curve identity, not a separate axis or a grouping construct of its own.
See also
- Interest Rate Curve Families — the hub.
- Funding and Projection Curves — where curve identity (including IBOR vs. RFR) is a discrete label.
- Multi-Curve Construction — the LIBOR-OIS basis and the discounting/projection split this classification explains.