The London Inter-Bank Offered Rate (LIBOR) is a benchmark interest rate that is set on a daily basis by a panel of banks. Each bank submits interest rates at which it would offer to lend money to other banks. These rates are provided for different periods that range from ‘overnight’ to a period of up to twelve months. Using a defined method, an average of the rates submitted by contributors is calculated and the LIBOR interest rate for each agreed period is made publically available every working day by an appointed administrator.
What is LIBOR?
What is changing?
In 2017, global banking regulators - including the UK’s Financial Conduct Authority (FCA) - announced significant changes to benchmark interest rates. Benchmark interest rates have been fundamental to the financial industry for decades and banks use them to price their products and services. These include relatively straightforward products such as loans, overdrafts and deposits. They are also used as the basis for more complex products such as securities and derivatives.
The LIBOR methodology is designed to produce an average rate that is representative of the rates at which large, leading internationally active banks with access to the wholesale, unsecured funding market could fund themselves. Since the financial crisis banks no longer fund themselves in this way. The decline in the underlying market means that LIBOR is now primarily sustained by the use of expert judgement; global regulators view this as unsustainable. Therefore, 2021 is the last year the FCA will compel panel banks to carry on providing these submissions to LIBOR. As a result, the FCA has stated that firms cannot rely on LIBOR being available after 31 December 2021.
Why is this change being made?
The FCA has an objective to protect the integrity of the UK financial services industry. It has proposed to replace the LIBOR benchmark interest rate with alternative reference rates. The majority of these benchmark interest rates differ from LIBOR as they will be based on actual transactions in active markets with prices driven by supply and demand. As a result, they will have minimal reliance on expert judgement from contributing banks. These new RFRs, and other benchmark interest rates, are likely to be used to replace LIBOR across the range of impacted products.
What is a Risk Free Reference Rate (RFR)?
A RFR, is calculated as a weighted average of executed traded volume in an overnight market. RFRs can be used as a benchmark to determine interest rates and payment obligations on numerous complex financial products from 2022, such as derivatives, bonds, loans, structured products and mortgages.
Regulatory Sponsored Working Groups have been set up to select alternative RFRs across all major currencies.
The Bank of England’s Working Group on Sterling Risk-Free Reference Rates (the “RFR Working Group”) has recommended using the Sterling Overnight Indexed Average rate (SONIA) as its preferred option for complex products. This reference rate is already widely used in the derivatives markets with a growing number of bonds using it as well.
In the US, the Alternative Reference Rate Committee (ARRC) has recommended the Secured Overnight Financing Rate (SOFR).
The European Central Bank (ECB) has recommended the Euro Short Term Rate (€STR) to replace the Euro Overnight Indexed Average rate (EONIA), which is currently not EU benchmark regulation compliant. €STR has been published by the ECB since October 2019.
Currency Alternate rate Working Group Nature UK Sterling Reformed SONIA Working Group on Sterling Risk-Free Rates Overnight, Unsecured USD SOFR Alternative Reference Rates Committee (ARRC) Overnight, Secured Euro €STR Working Group on Euro Risk-Free Rates Overnight, Unsecured
What are the main differences between LIBOR and RFRs?
LIBOR rates are forward-looking for certain identified terms (1 month, 3 month etc.) RFRs are point in time overnight rates.
LIBOR prices in term risk and bank credit risk whereas the RFRs do not include any term or bank credit risk.
What is Sterling Overnight Index average (SONIA)?
SONIA is an overnight rate based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors. The Bank of England is responsible for its governance and publication every London business day.
What is 'Term SONIA'?
Term SONIA is a forward-looking term reference rate based on overnight SONIA.
We do not currently offer lending products using Term SONIA but may look to do so in the future.
What is 'Compounded SONIA'?
Compounded SONIA is calculated as a ‘compound average’ of the individual daily SONIA rates across an interest period. The ’compound average’ is weighted for non-business days, for example, on a Friday, the weighting is 3 to account for Saturday and Sunday.
Alternative Sterling Reference Rates
Although the UK market has chosen SONIA as the primary RFR to replace LIBOR, the FCA has indicated that some small and medium-sized enterprises and/or retail clients may have a better understanding of the features of alternative reference rates for certain products.
What is the Bank of England Bank Rate (BoEBR)?
Bank of England Bank Rate (BoEBR), referred to as UK Base Rate,is set by the Bank of England's Monetary Policy Committee to determine the interest rate it pays to commercial banks that hold money with it.
What is Danske Bank Reference Rate (DBRR)?
Danske Bank Reference Rate (UK), referred to as DBRR, is the Bank’s own interest reference rate and is subject to change by the Bank. It will typically align with the Bank of England Bank Rate, but may vary from that rate. It will not fall below zero even if BoEBR does.
Alternative Reference Rates Method of Calculation Bank of England Bank Rate (BoEBR) Set by the Bank of England’s Monetary Policy Committee Danske Bank Reference Rate (DBRR) The Bank’s own reference rate will typically align with BoEBR, but may vary. Sterling Overnight Index average (SONIA) Interest rate paid by banks for unsecured transactions in the Sterling Market which is administered by the Bank of England Compounded SONIA SONIA rate is compounded over an observation period
When will this change take place?
The Bank of England and the FCA have stated that from 31 December 2021, banks will no longer be compelled to provide LIBOR quotations. This means that the setting of this key benchmark interest rate will likely be discontinued.
The FCA and Bank of England have both emphasised their expectation that banks will discontinue using LIBOR by the end of 2021. The RFR Working Group has set the following interim targets:
- April 2021 – firms to cease issuance of GBP LIBOR referencing loans, where maturity is after 2021
- Existing LIBOR agreements that are due to mature before the end of 2021 will run to maturity using LIBOR, unless they are refinanced
- Existing LIBOR agreements that mature in 2022 but have a final LIBOR fixing scheduled to take place in 2021 may also run to maturity
At Danske Bank UK we have decided to begin our phased migration of existing contracts from February 2021 to complete the transition before the end of this year in accordance with the Financial Conduct Authority's expectations.
What is Danske Bank UK doing to impliment the change?
Danske Bank UK has been fully engaged in the industry’s preparations to ensure a smooth and effective transition for customers. We are initiating a phased migration of straightforward products - such as loans, overdrafts and deposits - from February 2021 and will make contact with customers to advise them of next steps for their specific products.
Are other currencies affected?
Yes, alternative interest benchmarks have been selected for currencies within the Eurozone and in the USA.
Which Danske UK products are impacted?
Product Existing Rate New Reference Rate LIBOR Overdrafts LIBOR BoE Base Rate LIBOR Loans LIBOR DB Reference Rate Invoice Finance LIBOR BoE Base Rate
Currency Accounts Various IBORS EUR- ESTR
Multi Currency Options IBORS Variable STLs IBORS
<1M DB Reference Rate
>1M will be discussed with Relationship Manager
Bilateral and Syndicate Loans LIBOR (3M) Compounded SONIA
How will it impact me or my business?
Given the use of the LIBOR reference rate in relation to many financial products, the transition could have a financial and operational impact on your business. It is important that you understand how this may affect you.
What can I do now?
- Identify which products you have that reference LIBOR or IBORs;
- Identify which products mature after the end of 2021;
- Review alternative rates and their benefits and drawbacks for you;
- Consider how the transition may affect your systems, accounting and tax matters.
We strongly encourage you to stay up-to-date on the latest developments and to consider how these changes will impact your business using independent professional service providers (legal, accounting, financial, tax or other) as appropriate. You may also want to consider raising questions of, and expressing views to, relevant industry bodies, trade associations and working groups, including responding to public consultations whenever possible.
You can also contact your Relationship Manager for further information if required.
We will intermittently update this page with communications relating to these changes. In the interim if you require more general information on interest rate reform & LIBOR please see below useful links: