While ISDA consults on IBOR fallbacks for swaps done based on an IBOR that might disappear, the Working Group on Sterling Risk Free Reference Rates (set up by the Bank of England in 2015) is doing a complementary consultation on term SONIA reference rates for loans and FRNs for use after the IBORs cease and the parties want a term rate: i.e. a rate where you know at the start of the period what you’ll pay at the end of it (unlike backward-looking SONIA). Andrew Bailey said last week that term rates were not needed for most of the derivatives market; this consultation is about a market where they are, for two reasons:

  • operational and technological reasons – existing systems and settlement processes may not be able to cope with backward-looking rates, and secondary market trading in FRNs would be more awkward if you did not know the next coupon. And securitisations often have interest payments, cash balances and cross-currency exposures needing to be swapped back to a consistent reference rate to remove basis risk and meet ratings requirements;
  • financial risk and cashflow management – smaller corporates do not usually keep excessive liquidity and so need to know where they stand so they can manage cashflow.