…then you might want to get better acquainted with SONIA.
The London Inter-Bank Offered Rate (LIBOR) is, simply put, the average of the interest rates estimated by a selection of the leading banks that they would be charged if they were to borrow from the other leading banks.
As such, in broad terms, the lower the rate, the less risk there would appear to be in the financial system.
Those few words of explanation will probably make you start to think that it sounds a bit vague and open to interpretation. And you would be right.
LIBOR is important because it widely used as a reference rate for financial markets.
Think of some of the funds you might be invested in and how their benchmarks are set, or indeed perhaps how some of your LDI strategies use LIBOR as a reference. It is used as a reference rate for approximately £240tn worth of financial products.
It became apparent with the fallout from the financial crisis of the last decade that LIBOR was clearly flawed, leading the then Governor of the Bank of England, Mervyn King, to say that ‘it is not a rate at which anyone is actually borrowing’.
This may have been due to poor estimation, or downright manipulation.
To address some of the ‘flaws’, a replacement for LIBOR is being introduced, the Sterling Overnight Interbank Average rate, or SONIA.
It is not new, having been around since 1997, but it does have a fundamental difference from LIBOR insofar as it tracks actual rates rather than estimated rates (amongst other differences).
The Bank of England took over the administration of SONIA on the 23 April 2018.
The relevant point here, is that LIBOR will not be here forever, and that it would be sensible to ask the question how the introduction of SONIA will impact your scheme, particularly if you have LDI in place, or have funds that use LIBOR as a benchmark (in fact many of the LDI swaps are now SONIA and not LIBOR based).
There is no need to panic, just be prepared and aware.