As the LIBOR-SONIA transition gathers pace, financial markets, firms and associations are maintaining efforts to provide stakeholders with all the information they need to navigate the shift.
Two such organisations have taken the step of launching technology tools designed to help their audiences adjust to the sterling overnight index average (SONIA) age.
One of them is NatWest, who we will turn to shortly. The most recent, though, is ICE Benchmark Administration (IBA).
Last month, the data and market infrastructure specialists unveiled ICE SONIA Indexes – a platform that provides borrowers and lenders with a set of compounded in arrears SONIA-based Indexes.
The ICE SONIA Indexes will allow borrowers to calculate their interest expenses with certainty as they have been designed to match the key conventions being adopted by the SONIA-linked loan and bond markets.
Launched on 13 April, the ICE SONIA Indexes provide a daily value representing accrued, compound SONIA interest, relative to the first-day value of 100 from 23 April 2018 – the date when the Bank of England began to publish reformed SONIA.
To find out more about how the platform can help corporate treasurers through the transition, The Treasurer caught up with IBA’s COO Stelios Tselikas…
How do ICE SONIA Indexes benefit the operational side of treasury – what are its key advantages?
Since August 2020, the Bank of England has been publishing a SONIA Compounded Index. This Index simplifies and standardises the calculation of interest for financial contracts referencing SONIA by providing pre-calculated compound interest values for each business day. This calculation makes it ideal for use in certain financial agreements.
At ICE Benchmark Administration, we are providing a set of enhanced ICE SONIA Indexes to meet the additional operational and economic requirements of corporate borrowers and lenders.
In terms of operational benefits, the first is the market standard lookback feature, such as a two- or five-day lag, which enables treasurers to determine the total amount of interest due on a loan, before the end of the accrual period. This will help manage cash flows and operational issues in advance of an actual loan payment.
In addition, the SONIA Index family produced by IBA provides a second point of reference for borrowers to check the interest payment invoice that has been sent to them by their lending bank. The interest rate calculated by referencing the change in Index values between payment dates should match SONIA-based accruals that the bank is using to calculate the interest that is due by the corporate borrower.
The second operational benefit is that the values for the ICE SONIA Indexes are published for every calendar day, to facilitate accounting for loan accruals on quarter- and year-end dates that may be a weekend or other non-business days.
Publishing values each day of the year is absolutely critical for borrowers and their financial IT systems, because often year end and quarter ends fall on non-business days. The ability to calculate SONIA-based accruals efficiently and easily for accounting and controls purposes make the Index family a very useful tool when integrating SONIA into corporate systems.
And how about the economic benefits?
The ICE SONIA Indexes allow for a standardised approach when including a 0% floor in a lending agreement, if this is mutually acceptable to both the borrower and lender. This approach prevents the need to include a more complicated flooring mechanism in the lending arrangement or a more complicated floor calculation on a stand-alone basis.
The ICE SONIA Indexes provide a useful mechanism to help establish the economic value of a floor, if included in a lending arrangement, as the floor can be efficiently priced as it references SONIA only.
So, in a negative-rate scenario, the index will stay flat. When that trend reverses, the index will continue to grow.
How do you think ICE SONIA Indexes will benefit non-financial corporates as a whole?
In January this year, the Bank of England and the Financial Conduct Authority, alongside the Working Group on Sterling Risk-Free Reference Rates, released a statement accompanying an update to the Working Group’s Priorities and Roadmap.
The Roadmap sets out a series of deadlines for markets and their users to hit so they will be fully prepared for the end of sterling LIBOR by the end of 2021.
In addition to its update, the Working Group has recommended that, from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after year-end 2021.
Given those announcements and set milestones, IBA expects usage of its ICE SONIA Indexes to grow significantly in the coming weeks.
UK lenders and borrowers will want to meet the deadlines established by the Working Group and the Official Sector, and cease entering new loans or other forms of credit tied to LIBOR.
With that firmly in mind, IBA stands ready to help borrowers by providing them with efficient and timely access to the ICE SONIA Indexes for use in new contracts or for checking accruals on SONIA-based loans.
Borrowers are invited and encouraged to contact IBA to get more information about the ICE SONIA Indexes and how those rates can be incorporated within a company’s financial operations and controls.
NatWest, meanwhile, has had its own ready reckoner up and running since July 2019.
Dubbed RealisedRate, the platform was devised in response to calls from the Working Group, which urged financial markets organisations to develop a calculator “to support the adoption of SONIA-based instruments”.
Free to use, RealisedRate provides users with:
Users can embed their calculation results in their own applications or spreadsheets, with the aid of a program interface.
ICE SONIA Indexes
For a deeper dive into how ICE SONIA Indexes works, read an accompanying white paper from IBA.
Click here for the official ICE SONIA Indexes website.
RealisedRate
Click here for a special video presentation on how RealisedRate works.
For further details, read NatWest’s Introduction to the platform.
Find the official RealisedRate website here.
Matt Packer is a freelance business, finance and leadership journalist
Further ACT resources on the LIBOR transition can be found here: treasurers.org/hub/technical/libor.