SONIA replaces LIBOR

21.9.2019

Stanislav Štípek
stanislav.stipek@moorestephens.cz

The reference rate LIBOR (London Inter-bank Offered Rate) will be replaced by the benchmark rate SONIA (Sterling Overnight Index Average) beginning in 2021. This is probably due to a 2012 scandal, when it was discovered that banks, instead of the actual rates they were paying or would be expected to pay for loans from other banks, submitted deliberately overstated or underestimated rates in order to make a profit from the transactions.

This transition could entail huge costs for the industry. The LIBOR is the cornerstone of today’s financial system, with more than USD 240 trillion in global financial products using it as a reference rate. Moving away from it will impact a significant number of banking and non-banking products linked to it.

SONIA is an index that monitors the rates of current one-day financing agreements on wholesale money markets and, unlike LIBOR, it does not rely on the client.

We recommend clients to map financial transactions that are linked to the LIBOR reference rate and, if they are still valid after 2021, enter negotiations with the counterparty to change to SONIA or another reference rate.

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