Libor Transition | RBS International

Planning for LIBOR transition

LIBOR

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.

Helpful guides

Download our guides to read about the five steps you can take to start preparing for the transition and your alternative options to LIBOR.

What's changing and why

What is LIBOR?
London Interbank Offered Rate (LIBOR) widely used in the global financial markets.

LIBOR is one of a number of Interbank Offered Rates (IBORs) that are widely used in the global financial markets.

It’s used as a key interest rate benchmark across a number of derivatives, bonds, loans, securitisations, deposits and other products, as well as for banks' and other financial institutions own funding and capital needs.

LIBOR is calculated and published daily across five currencies (GBP, USD, EUR, JPY and CHF) and seven maturities (overnight, one week, and 1, 2, 3, 6 and 12 months) by the Intercontinental Exchange Benchmark Administrator (ICE BA). It’s based on submissions by a panel of banks using available transaction data and their expert judgement.

LIBOR should provide an indication of the average rate at which each LIBOR contributor can borrow unsecured funds in the London interbank market for a given period, in a given currency.

This average is published and used by the financial markets.

"The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks that are based upon these markets… the planning and transition must now begin."

Andrew Bailey, Chief Executive Officer, FCA

Background
Since 2013: International regulators began focusing on IBOR reform.

Since 2013: International regulators began focusing on IBOR reform. With the number of interbank unsecured borrowing transactions reducing in recent years, there has been an increasing reliance on the expert judgement of panel banks on which to base LIBOR. This has led to concerns that LIBOR is no longer a representative or reliable benchmark reference rate.

July 2017: Andrew Bailey, Chief Executive Officer of the Financial Conduct Authority (FCA) announced that the FCA would not persuade or compel LIBOR panel banks to make LIBOR submissions beyond the end of 2021.

July 2018: The FCA and US Commodity Futures Trading Commission (CFTC), among other regulators and industry groups, told the global market they need to accelerate efforts to stop using products that reference LIBOR, and transition to alternative Risk-Free Rates (RFRs).

There are a number of RFRs being considered.

Risk-Free Rates
Working Groups have been set up to select alternative RFRs across all major currencies.

Working Groups have been set up to select alternative RFRs across all major currencies.
 

  • The Bank of England’s Working Group on Sterling Risk-Free Reference Rates has recommended using the Sterling Overnight Indexed Average rate (SONIA) as its preferred option. This reference rate is already widely used in the derivatives markets with a growing number of Bonds using it as well. 
  • In the US the Alternative Reference Rate Committee (ARRC) has recommended the Secured Overnight Financing Rate (SOFR). 

See the summary of IBOR replacement rates here.

See the latest factsheet from the Bank of England here.

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 defned period since the Bank of England started publishing the SONIA interest rate benchmark. 

Try out the SONIA Realised Rate Calculator here.

Key dates

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. 

Key dates (PDF, 23KB)
Supporting the LIBOR transition

Supporting the market
By the end of 2021 GBP LIBOR will most likely be replaced by SONIA

By the end of 2021 GBP LIBOR will be replaced by SONIA (Sterling Overnight Index Average) as the Risk-Free Reference Rate for Sterling transactions. However it's not as simple as just replacing one rate with another. To move to a different benchmark - in this case SONIA - there must be a market for that rate.

This is only developed over time as financial institutions, corporate investors and commercial customers start to use this alternative rate and the demand and liquidity in the market grow.

The NatWest Group has been among the frontrunners in helping to establish a SONIA market. NatWest Markets have actively supported the liquidity of a Reformed SONIA derivative market since the introduction of the new benchmark in 2018, and has worked with large financial institutions as bookrunner to facilitate SONIA transactions helping to establish a SONIA market.

In March 2019 NatWest Bank Plc launched and priced the first SONIA-linked benchmark issuance for RBSG, issuing a £750m 4-year Covered Bond at SONIA + 60bps.

In June 2019 NatWest delivered the market's first loan referencing the SONIA rate in a pilot with one of our large corporate customers.

Supporting clients
Client education is a vital part of the transition from IBORs to RFRs

Client education is a vital part of the transition from IBORs to RFRs. We know that one of the challenges for clients is that SONIA is a backward-looking rate.

To help clients get comfortable with what this means in practice, try out the NatWest Markets SONIA Realised Rate Calculator. Clients can use the calculator to see how to use daily realised rates to construct a compounded rate over time. 

The calculator is available here

Frequently asked questions

More information on the alternative Risk-Free Rates. 

See Frequently asked questions
Summary of IBOR replacement rates
Currency Alternative rate Working Group Nature
USD SOFR Alternative Reference Rates Committee (ARRC) Overnight, Secured
UK Sterling Reformed SONIA Working Group on Sterling Risk-Free Rates Overnight, Unsecured
Swiss Franc SARON National Working Group on Swiss Franc Reference Rates Overnight, Secured
Tokyo JPY TONAR Study Group on Risk-Free Reference Rates Overnight, Unsecured
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