International regulators began focusing on Interbank Offered Rates (IBORs) reform since 2013. 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. Between now and the end of 2021, the global financial markets will transition away from using IBORs in financial contracts.
International regulators are encouraging the development and adoption of “Risk-Free Rates” (RFRs) which are currently proposed to be overnight and term free. Working groups have been established across all major currencies to select alternative overnight rates with four already selected:
Markets are already beginning to adopt these rates; there has been an increase in the volume of SONIA-referenced swaps in the market as well as recent examples of primary issuance of bonds referencing SONIA or SOFR.
LIBOR is the London Interbank Offered Rate. LIBOR is one of a number of IBORs that are widely used in the financial markets, including as a reference rate to a vast number of derivatives, bonds, loans, securitisations, and deposits. Other IBORs include EURIBOR for Euro and USD LIBOR Rate for Dollar transactions.
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.
Royal Bank of Scotland International supports the market transition from LIBOR. We're working closely with market participants, industry bodies and trade associations, to make sure the transition is as smooth as possible.
We are monitoring the guidance from the UK regulators.
We are proactively contacting affected customers and Relationship Managers are available for further queries.
SONIA (Sterling Overnight Indexed Average) 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 will replace GBP LIBOR across global financial markets by the end of 2021.
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.
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.
NatWest Group have created an online 'calculator' which shows you what the annualised compounded interest rate is for any defined period since the Bank of England started publishing the SONIA interest rate benchmark.