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LIBOR

Planning for
LIBOR Transition

The LIBOR interest benchmark is changing

Interbank Offered Rates (IBORs) are expected to be replaced by new Risk-Free Rates (RFRs) across the global financial markets. Based on statements by the FCA, the expectation is that the London Interbank Offered Rate (LIBOR) will no longer be a credible lending rate after the end of 2021. Work is also underway for the replacement of other global IBORs.

There is considerable work being done across the industry to develop new Risk-Free Rates. Given the complexity of changes to these critical benchmarks of the global financial system we want to share some information with you now about the anticipated transition.

Five steps you can take to start preparing

Download our overview.

What's changing and why

What is LIBOR?

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

Background

Since 2013: International regulators began focusing on IBOR reform.

Risk-Free Rates

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

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.

Key dates

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. 

Supporting the LIBOR transition

Supporting the market

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

Supporting clients

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

Frequently asked questions

More information on the alternative Risk-Free Rates. 

Summary of IBOR replacement rates

* Secured Overnight Financing rate;** Swiss Average Rate Overnight;*** Tokyo Overnight Average Rate;**** €STER is the new wholesale unsecured overnight bank borrowing rate, which the ECB will produce before 2020.