January 12, 2021 - It is no secret that loan market participants – at least in the US – are anxiously awaiting the development of non-Libor term rates. They may be one step closer this week as two term SONIA (the risk free rate replacing sterling LIBOR) benchmarks become available for use by market participants. On January 11th ICE Benchmark Administration and Refinitiv launched their respective Term SONIA benchmarks. Both benchmarks are administered by their regulated entities meaning they are seen as regulatory compliant and are available in 1-month, 3-month, 6-month and 12-month tenors. The availability of these benchmarks is in line with the FCA’s instruction that regulated institutions cease sterling LIBOR-referenced loan originations by the end of the first quarter of 2021. As reported by Risk.net, the FCA expects approximately 10% of the UK lending market to use a term SONIA rate rather than the SONIA compounded in arrears version expected to be used by most in the wholesale sterling financial markets. This remains to be seen, but the competition among term rate providers is expected to be fierce and many believe the landscape will be whittled down.
The official sector in the US has not been prescriptive on the use of term rates – at least not yet – and the ARRC is in the process of gathering proposals from vendors vying to administer the ARRC-recommended term SOFR benchmark. Results of the RFP process have not been published, but the 2020 ARRC Objectives target the availability of a recommended term SOFR benchmark by the end of June 2021. For now, US market participants eagerly await the development of an ARRC-recommended term SOFR benchmark and the recent launch of term SONIA benchmarks is a step in the right direction.