Benchmark Jargon Buster

06 May 2021

Author: Orla Hanna
Practice Area: Banking & Finance


It seems that the world has become a little obsessed with acronyms. The realm of interest benchmarks is no different. LIBOR, EURIBOR, HIBOR, SIBOR, BBSY, SONIA, EONIA, SOFR, SARON, TONAR, ESTER and the list goes on. Over the next year, as LIBOR transition inevitably picks up speed, you will notice a number of new terms entering your transaction documents and sometimes without much explanation. This article provides a very brief guide to some of the terms you may come across. After all, it is important to KEY (Keep Educating Yourself).

This will be old news, but as a reminder, LIBOR stands for the London Interbank Offer Rate. The FCA (Financial Conduct Authority) formerly announced on 5 March 2021 that LIBOR rates will cease to be available: (i) immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and (ii) immediately after 30 June 2023, in the case of the remaining US dollar settings. As a result of that FCA announcement, the ISDA (International Swaps and Derivatives Association) confirmed that the spread adjustments, used in IBOR fallbacks within their standard derivative contracts, are now fixed as of 5 March 2021. Some much welcome clarity to the Derivatives market.

Although it is not set in stone, we are seeing a number of financial institutions moving from LIBOR to SONIA for sterling transactions. Not to be confused with the awesome singer (writer is clearly showing her age), SONIA, stands for the Sterling Overnight Index Average. For the mathematically gifted amongst us, the Bank of England website sets out the rather complex formula used for calculating this rate. SONIA is often described as a RFR (Risk Free Rate). This is because no bank credit risk premium is included in the calculation of the SONIA rate.

Initially, the biggest difference between LIBOR and SONIA was that LIBOR is forward-looking, i.e. it is agreed at the start of an interest period, whereas SONIA was backward-looking with the rate not determined until the end of the interest period and accordingly there would be some uncertainty for the parties. However, as of 11 January 2021, IBA (ICE Benchmark Administration Limited) launched its ICE TSRR (ICE Term SONIA Reference Rates) for use as a benchmark. The ICE TSRR are designed to measure, on a daily basis, expected (i.e. forward-looking) SONIA rates over one month, three month, six month and 12 month time periods. ICE TSRR “should help the many businesses, borrowers and lenders who have sought a forward-looking term SONIA benchmark to provide certainty when calculating their interest expenses and other contractual payments in advance” according to the IBA.

Some other key notable acronyms are:

EONIA stands for the Euro OverNight Index Average. It is a one day interbank interest rate for the euro zone, i.e. the rate at which banks provide loans to each other with a duration of 1 day. It will be discontinued on 3 January 2022 and replaced by the €STR.

€STR stands for Euro Short-Term Rate. It was first published on 2 October 2019 and is calculated by the ECB (European Central Bank) based on the wholesale euro unsecured overnight borrowing costs of banks located in the euro area.

EURIBOR stands for the Euro Interbank Offered Rate. EURIBOR has been reformed sufficiently that at present it will continue. However, fallback provisions should be included in all contracts using EURIBOR to be based on the €STR.

SOFR stands for Secured Overnight Financing Rate and is an alternative to LIBOR for USD transactions. Like SONIA, SOFR is backward looking. At present there is no forward-looking term SOFR but it is hoped a term rate would be available by end of 2021.

With so much change in the benchmark world, present and future, and if you are in doubt as to whether your document is referring to the latest trendy rapper or some pivotal financing term, then always ask the question. Remember to KEY!

If you have any queries the Banking team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.