The recommendations reiterate that market participants should be ready to offer non-LIBOR loans’ products by end Q3 2020. SONIA compounded in arrears remains the Working Group’s recommended alternative to Sterling LIBOR and the intent of the recommendations is to enable and expedite the transition away from the use of LIBOR based products for the loan market.
Summary of recommendations:
- SONIA remains the Working Group’s recommended alternative to Sterling LIBOR, implemented via a compounded in arrears methodology, and loan markets should now move consistently towards this.
- Use of a Five Banking Days Lookback without Observation Shift is recommended as the standard approach by the Working Group. This aligns with the approach recommended by the Alternative Reference Rate Committee for US dollar loan markets and in the Working Group’s view is most likely to be made rapidly available. Whilst this approach is the recommendation, where lenders are also able to offer lookback with an observation shift this remains a viable and robust alternative (see the Annex set out in the recommendations paper).
- Where an interest rate floor is used, the Working Group recognises that it may be necessary to apply the floor to each daily interest rate before compounding.
- The Working Group recommends that accrued interest should be paid at the time of principal prepayment. These recommendations are published in order to assist market participants who have been awaiting direction on the preferred methodology prior to commencing implementation and developing their standard product offerings.
The recommendations are not binding and the Working Group recognises that in certain transaction or client-specific circumstances an alternative methodology or rate may be more appropriate or convenient, and that market conventions may continue to evolve over time.
Detailed recommendations can be found here.
