LIBOR Transition | Ulster Bank

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LIBOR

Planning for LIBOR Transition

Add your signposting title here… 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 Financial Conduct Authority (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

LIBOR transition overview

Download our overview

What's changing and why?
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Icon expand What is LIBOR?

The London Interbank Offered Rate (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, Financial Conduct Authority

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Icon expand History

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.

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Icon expand Risk-Free Rates

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. The requirement for a Term SONIA Reference Rate (TSRR) is actively being considered by the industry in conjunction with the Bank of England and the FCA. 

    See the latest factsheet from the Bank of England here.

  • In the US the Alternative Reference Rate Committee (ARRC) has recommended the Secured Overnight Financing Rate (SOFR). The requirement for a Term SOFR is also being considered by the industry and the ARRC.
 
  • The European Central Bank (ECB) has recommended the Euro Short Term Rate (ESTER) to replace the Euro Overnight Indexed Average rate (EONIA), which is currently not EU benchmark regulation compliant. ESTER is due to be published by the ECB from October 2019.
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Icon expand SONIA

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.

For more detailed information on SONIA click here.

Add your signposting title here… Key dates

NatWest Group 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.

Key dates (PDF, 23kb)
Supporting the LIBOR transition

Supporting the market

By the end of 2021 GBP LIBOR will most likely 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, 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.

 

Supporting clients

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, NatWest Markets have developed a simple calculator to help clients get comfortable with what a SONIA rate means in practice. 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.

Frequently Asked Questions
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Icon expand What is IBOR?

IBOR, which stands for Inter Bank Offered Rate, is the interest rate at which banks lend to and borrow from one another in the interbank market.

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Icon expand What is LIBOR?

LIBOR is the London Interbank Offered Rate. LIBOR is one of a number of IBORs that are widely used in the financial markets, including as a reference rate to a vast number of derivatives, bonds, loans, securitisations, and deposits. Other IBORs include EURIBOR for Euro and USD LIBOR Rate for Dollar transactions.

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Icon expand How is LIBOR calculated?

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.

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Icon expand Why are IBORs being replaced?

International regulators began focussing on IBOR reform since 2013.  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. Between now and the end of 2021, the global financial markets will transition away from using interbank offered rates (IBORs) in financial contracts.

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Icon expand What will replace IBORs?

International regulators are encouraging the development and adoption of “Risk-Free Rates” (RFRs) which are currently proposed to be overnight and term free. Working groups have been established across all major currencies to select alternative  overnight rates with four already selected:
 

1. SONIA (GBP)
2. SOFR (USD)
3. TONAR (JPY)
4. SARON (CHF)

Markets are already beginning to adopt these rates; there has been an increase in the volume of SONIA-referenced swaps in the market as well as recent examples of primary issuance of bonds referencing SONIA or SOFR.

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Icon expand How are we responding?

Ulster Bank 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.

Add your signposting title here… SONIA – an overview
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Icon expand 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.

SONIA Realised Rate Calculator

LIBOR Transition | Ulster Bank Summary of IBOR rate replacements
Currency Alternative rate Working Group Nature
USD *SOFR Alternative Reference Rates Committee (ARRC) Overnight, Secured
UK Sterling Reformed SONIA Working Group on Sterling Risk-Free Rates Overnight, Unsecured
Swiss Franc **SARON National Working Group on Swiss Franc Reference Rates Overnight, Secured
Tokyo JPY ***TONAR Study Group on Risk-Free Reference Rates Overnight, Unsecured
Euro ****€STER Working Group on Euro Risk-Free Rates Overnight, Unsecured

* 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.

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