The LIBOR interest benchmark is changing
Interbank Offered Rates (IBORs) will be replaced by new Risk-Free Rates (RFRs) across the global financial markets. The London Interbank Offered Rate (LIBOR) will no longer be a credible lending rate after the end of 2021.
There is considerable work being done across the industry to develop new RFRs. Given the complexity of changes to these critical benchmarks of the global financial system we want to share some information about the transition with clients before they happen.
What's changing and why
SONIA - An overview
LIBOR is a forward-looking term rate. However Sterling Over Night Indexed Average (SONIA) is a backward-looking, overnight rate based on actual transactions that have taken place the day before.
SONIA is an overnight rate, set in arrears and based on actual transactions in overnight indexed swaps for unsecured transactions in the Sterling market. SONIA is a risk-free rate meaning no bank credit risk is included.
SONIA is expected to replace GBP LIBOR across global financial markets by the end of 2021.
How is SONIA calculated?
Each London business day the SONIA fixing is calculated as the weighted average rate of all unsecured overnight sterling transactions brokered in London by Wholesale Markets Brokers’ Association (WMBA) members between 12am and 3.15pm London time in a minimum deal size of £25m.
Is SONIA a Term Rate?
SONIA is an overnight rate, not a term rate.
A term rate provides borrowers with a known interest rate for the period of borrowing and therefore provides up-front certainty of the amount of interest due at the end of the interest period. Some borrowers may find this helpful for their cashflow forecast.
SONIA is an overnight rate, based on actual market rates and reset on a daily basis in arrears; this removes any expectation of future events inherent in a forward-looking term rate.
Can I calculate a compounded rate for SONIA?
Our NatWest Group colleagues in NatWest Markets have shared developed a simple ‘calculator’ to help clients get comfortable with what a SONIA rate means in practice. This calculator shows you what the annualise compounded interest rate is for any defined period since the Bank of England started publishing the SONIA interest rate benchmark.
Try out the SONIA Realised Rate Calculator here.
RBS International supports the market transition from LIBOR. We’re working closely with our regulators, market participants, industry bodies and trade associations, to make sure the transition is as smooth as possible.
Use the link below for an at a glance view of key dates.