Many corporates, which have floating rate loans and/or interest rate swaps that are linked to the ‘London Interbank Offered Rate’ (LIBOR) benchmark, are preparing the transition to the ‘Sterling Overnight Interbank Average Rate’ (SONIA).
LIBOR was launched in 1986 and served as a benchmark for USD, JPN & GBP and is currently used in many financial contracts.
As a result of a number of scandals that took place in 2008, the regulators where encouraged to switch from interbank offered rates to risk free rates. Following recommendations by the Bank of England (BoE), SONIA (already available since 1997) was put forward as the alternative. Since SONIA is based on averages, it is difficult to manipulate.
We expect banks to approach treasurers early 2021 to achieve an early switch of instruments since they will favour a gradual transition rather than a big bang scenario.
From a mathematical perspective, it is a different way of calculating interest. It can be done in Excel, but be careful, it will be very time-consuming since the calculation methodology requires a number of rates and margins. A proper Treasury Management System will definitely save a lot of headache.