Alternative risk-free rates (ARFRs), Demystified
LIBOR (London Inter Bank Overnight Rate) is used by banks across the globe to reference the floating rates of cash and derivative products. But the methodology used to set LIBOR is flawed and caused a major scandal a decade ago. With interbank lending also in decline, increasing liquidity risks, regional regulators have selected alternate risk-free reference rates (RFRs) to replace LIBOR. UK regulators have advised financial institutions to move away from the use of Sterling LIBOR by the end of 2021, to use the Sterling Overnight Index Average (SONIA) RFR.
The transition is not straightforward: LIBOR is quoted across several tenors, while SONIA is only published as an overnight rate; and LIBOR incorporates a credit risk spread, but SONIA does not. Expleo has developed extensive expertise in the use of the complex calculation methodologies required to complete the transition into an adjusted form of SONIA. This white paper outlines why banks should work with an experienced partner like Expleo, to ensure the most cost-effective, successful transition, with all associated impacts and risks identified, tested and managed appropriately.
Banks will benefit from using Expleo’s specialist expertise to manage the transition from Sterling LIBOR to SONIA.
