Planning for LIBOR Transition
The LIBOR Interest Benchmark is ending
On 5 March 2021 the Financial Conduct Authority confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:
- immediately after 31 December 2021, in the case of all sterling, euro, Swiss Franc and Japanese Yen settings, and the 1-week and 2-month US Dollar settings; and
- immediately after 30 June 2023, in the case of the remaining US Dollar settings
Further details can be found on the FCA website.
31 March 2021
In line with the Working Group on Sterling Risk-Free Reference Rates (Sterling RFRWG) recommended milestones, NatWest Group (NWG) no longer offer new GBP LIBOR-linked loans from the end of March 2021. This milestone applies to all GBP-linked bilateral and syndicated new lending, including multicurrency facilities, as well as the amendment or refinancing of existing facilities which from 1 April 2021 must instead be linked to SONIA or an alternative Risk-Free Reference rate.
The Sterling RFRWG has issued a Q&A document and a Best Practice Guide to assist market participants in transitioning away from the use of LIBOR in the GBP loan market in accordance with the recommended milestones.
NWG is a member of the Sterling RFRWG and Chair of the Loan Enablers Task Force established to help facilitate the launch and adoption of SONIA loan products in the GBP market. NWG fully supports the Sterling RFRWG milestones and is actively working to help customers navigate away from LIBOR for both new and existing lending.
What's changing and why
SONIA - An overview
LIBOR is a forward-looking term rate. However SONIA is a backward-looking, overnight rate based on actual transactions that have taken place the day before. Recognising that certain markets, for example cash and lending, may prefer forward-looking term characteristics, the Bank of England has gathered market views on a forward-looking Term SONIA Reference Rate (TSRR). A decision should be made later this year.
A summary of responses to the consultation can be found here.
What is SONIA?
SONIA (Sterling Over Night 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 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.
There is some industry discussion about the possibility of creating a forward-looking “term SONIA” rate. However, the potential scope of where such a rate may be preferable, the methodology for its creation, and the timing of its introduction, all remain uncertain. The advice from the FCA is that firms should not wait for, or rely on, the development of any potential term SONIA rate.
Can I calculate a compounded rate for SONIA?
Our online 'calculator' 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.
Try out the SONIA Realised Rate Calculator.
RBS 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.