Regulators have made it clear that markets need to move away from financial contracts that reference interbank offered rates (IBORs) as soon as possible and well in advance of the end of mandatory LIBOR submissions at the end of 2021. Regulated firms are already expected to have a plan for this transition, including in relation to their legacy book. It is particularly important that this is addressed in relation to any new financial contracts, in particular those that are not easy to amend in the future.
Alternative near-risk free rates have been identified, including SOFR for US dollar markets, SONIA for sterling markets, ESTER for euro markets, TONA for yen markets and SARON for Swiss franc markets. These are not forward-looking term rates but are overnight rates (and in some cases are secured rates) so are not direct replacements for existing IBORs in the term markets, which will mean that markets have to adjust. This adjustment is already taking place as we are already seeing examples of new bond issues referencing SOFR and SONIA, with public institutions including the European Investment Bank and the World Bank leading the way and financial institutions such as Lloyds Banking Group and Santander recently also issuing SONIA-linked bonds.
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