LIBOR to SONIA Transition | What, Why, How, When | PRA UK updates

Thursday, January 17, 2019 - LIBOR will be replaced by SONIA. Here is a quick walk of basics and latest updates:

LIBOR (London Inter-bank Offered Rate) will soon be replaced by new rate called SONIA (Sterling Overnight Index Average).

What is LIBOR?
Banks in London estimate their respective interest rate at which they would lend to other banks. LIBOR is an average of these rates. 

Why it is being replaced?
LIBOR is prone to manipulations by the submitters. In 2012, traders and rate-setters manipulated the submitted rates that reaped huge profits to the trading position.

How SONIA will help?
SONIA is not calculated by average rates of submitter but through an index that tracks the rates of actual overnight funding deals on the unsecured wholesale money markets. This is risk free as compared to LIBOR.

When will this shift happen?
Regulators planned to switch from LIBOR to SONIA completely by 2021 post which LIBOR won't be guaranteed by FCA. 

As of now, SONIA for the previous London business day is published by authorised distributors at 9am.

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