What this means for our customers

While the market for alternative RFRs is still developing, LIBOR continues to be a widely accepted benchmark in corporate and commercial loans and other financial products.

For new or existing products that may be affected, the global financial markets are working together to agree how best to transition to the alternative RFRs by the end of 2021, or in some cases earlier.

We’ll continue to speak to our customers as these plans develop.

A few things to think about

Overnight rate versus a term rate

  • LIBOR is a term rate that included an element of credit spread reflecting the borrowing risk on the interbank market.
  • A term rate provides borrowers with a known interest rate for the period of borrowing and therefore the amount of interest due at the end of the borrowing term, something that some borrowers may find helpful for cashflow forecast.
  • An overnight rate, based on actual transactions and reset on a daily basis in arrears removes any expectation of future events inherent in a term rate. SONIA is likely to be a less volatile rate and borrowers may favour a less volatile rate that is only known at the end of the borrowing period as opposed to a more volatile term rate known at the start of the borrowing period.
  • Development of a TSRR would provide borrowers with a rate at the beginning of the borrowing period.
  • Alternative term RFRs are also being considered in the US and Europe that may operate in different ways to SONIA.

Different product approaches

  • In line with general market consensus it may be sensible to include fallback provisions in contractual documentation (fallback provisions are already included for derivatives products) in case an IBOR stops being used before the relevant transition is completed.
  • This may take the form of a roadmap to determine a replacement rate or reference to a specific replacement rate.
  • As the alternative RFRs market develops, it’s possible that differences could occur in relation to fallbacks. These could be , for example, different trigger events, timings, or even a different fallback rate.

Multi-currency products

  • Replacement RFRs may change how a multi-currency product operates and again the market is working together to find the best solution