“London Interbank Offered Rate”, will be phased out at the end of 2021 with UK financial services providers transitioning to a new “risk free rate” (RFR), known as SONIA, the “sterling overnight index average”. This move was prompted by the dwindling number of interbank borrowing transactions which resulted in LIBOR becoming unsustainable.
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 launched and priced the first SONIA-linked benchmark issuance for the NatWest Group, 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.
Client education is a vital part of the transition from IBORs to RFRs. A particular challenge 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.