Whitepaper: LIBOR – SONIA: Nuts & Bolts and Systems

Market Insight

There has been plenty written now on the LIBOR/SONIA transition and the methodology is becoming clear, albeit undoubtedly more complicated than originally envisaged. The purpose of this client briefing note is to offer some comments on calculation methodologies, discuss operational implications and explain how a treasury management system can help you through the transition. We also explain how the treasury management system we offer (titantreasury) can help from an operational perspective, for those clients where automation may be useful. 

This note has been prompted by the passage of time since our last paper on LIBOR (which has more on the historical context) but also by the announcement on 5th March 2021 by the Financial Conduct Authority on “future cessation and loss of representativeness of the LIBOR benchmarks”. The operative clause for many readers in the UK will be the statement:

“Immediately after 31 December 2021 …1-month, 3-month and 6-month sterling LIBOR settings will no longer be representative and representativeness will not be restored.”

This has two main effects in our view:

1) Confirmation that the policy remains on track. There are exceptions for USD LIBOR and likely to be provision to deal with genuine “tough legacy contracts” but for Sterling loans and derivatives the coffin has one fewer nail left not firmly hammered down.

2) It aligns with the framework set up by the International Swaps and Derivatives Association (“ISDA”) and it triggers the fixing of the Spread Adjustments which will apply for derivatives where parties have adopted the “ISDA Protocol”.

3) The Spread Adjustment for 3-month GBP LIBOR (for example) for relevant contracts is now set at 11.93 basis points. Corporates will often not be locked to these spread adjustments, even for derivatives, but they are gaining status as ‘benchmarks’.

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