The U.K.'s Working Group on Sterling Risk-Free Reference Rates has published a set of non-binding Recommendations on the conventions that market participants may wish to adopt to support their use of the Sterling Overnight Index Average as a replacement for LIBOR in sterling bilateral and syndicated loan facilities. The Recommendations are:
- Implementation by loan market participants of SONIA via a compounded in arrears methodology in place of sterling LIBOR;
- Use of a "Five Banking Days Lookback without Observation Shift" approach, to ensure sufficient time is available to calculate, notify and collect interest payments on the basis of compounded in arrears rates (although lookback with an observation shift is also a viable alternative for lenders able to offer this option);
- Application of an interest rate floor to each daily interest rate prior to compounding; and
- Payment of accrued interest at the time of a principal prepayment.
The Recommendations are intended to expedite the move away from LIBOR-referencing financial products, in line with the Working Group's aim that market participants are able to offer non-LIBOR loan products by the end of Q3 2020. Alongside the Recommendations, the Working Group has also published supporting slides providing further color on the Recommendations, worked examples of relevant calculations and the results of the Working Group's survey on risk-free rate compounding conventions for the Sterling loan market.
View the Bank of England's September 2020 LIBOR updates.
View the Working Group's Recommendations for SONIA Loan Market Conventions.
View the Working Group's supporting slides.
View the summary of results of the Working Group's survey.