Planning for LIBOR transition

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

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 Risk-Free Rates being considered.

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.

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.

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.