We use cookies on our website to enhance your browsing experience. By continuing to use this site without changing your settings you consent to our use of cookies in accordance with our cookie policy. To learn more about cookies, how we use them on our site and how to change your cookie settings please view our cookie policy.

Close Cookie Bar

What have we been up to

NEWS & VIEWS

Donec varius pellentesque metus, at vehicula magna egestas quis. Sed purus ipsum, vehicula id libero laoreet, posuere ornare urna. In eu nulla leo. Nullam pellentesque dolor nec scelerisque consequat.

Libor to SONIA: an update

image
Share on Linkedin
+ -
If you thought this page is useful to your friend, use this form to send.
Friend Email
Enter your message

Following our note on Libor in August, there have been some developments.

We responded to the Bank of England’s whitepaper SONIA as the RFR and approaches to adoption raising a number of concerns about the potential replacement of LIBOR with SONIA that are likely to affect our clients.  This will help to ensure they start to be placed on the agenda of the Bank of England’s working group.

The Bank of England’s working group on sterling risk-free reference rates has set up a sub-group to focus on term SONIA reference rates, an area we highlighted in our response to whitepaper in September. There are a number of alternative approaches to generating a term fixing however, we still favour the use of the short-term OIS market to generate these fixings.

The need for a term SONIA reference rate arises from the backwards-looking nature of SONIA, which is likely to create operational challenges for borrowers and lenders alike. The fact is that the current infrastructure of many lenders does not cater for a daily-compounded average SONIA rate. Leaving aside the necessary overhaul of IT, from 23 April 2017 SONIA will be published on the next business day. The agent of a loan will only be able to start calculating and preparing loan interest reset notices the day after the interest period has ended, meaning that, at best, the payment of interest will occur three business days after the interest period. 

There have been two notable market developments regarding derivative instruments that reference SONIA the risk-free reference rate chosen by the Bank of England:

1. At the end of October, ICE announced it will launch a new one-month SONIA future starting from 1 December 2017. The contract will be available up to maturities of 24 months and will operate much as I described in my podcast with Derivsource. It will be settled in arrears based on the average SONIA rate during the delivery month and can be traded up to the last business day of the delivery month before being settled on the next business day. The Bank of England working group is still considering different approaches to the futures market so we may see competing futures products in due course.

2. As we highlighted in our note in August, there are concerted efforts to extend the range of tenors of OIS that will be clearable by LCH. We understand that LCH has now completed the necessary internal approvals for extending clearing of OIS out to 50 years and is aiming to launch the change by the end of 2017. This is an extremely welcome development, as it will help encourage more liquidity in these contracts going forward. 

Finally, the Bank of England has now published a summary of the responses to their whitepaper. It is clear from responses that there is broad agreement on the choice of SONIA as the new risk free reference rate and that the challenge now is the transition from LIBOR.

 

AUTHOR SPOTLIGHT

ARCHIVED

RELATED ARTICLEs

The August Budget: a sophomore slump?

image
28thNovember 2017

Second albums are always a tricky business. There is even a term for it – the Sophomore Slump – and it is...

read more

Have we seen interest rates bottom out?

image
13thJuly 2017

Making sense of financial markets is notoriously hard. One might be able to construct a story around anything and use post-hoc...

read more

How can we help you

Have you got a question about how you hedge your financial risks, or structure and arrange your debt?

Find out how we can help you by contacting us today.

 

contact us

Stay Connected

Would you like news and views on local and global financial markets?

Sign up today to receive news straight to your inbox.

By providing your email address you agree to receive marketing emails from JCRA. We won’t ever spam you. See our privacy policy.

CLOSE

SIGN UP FOR NEWS

Subscribe