LIBOR is one of several interbank interest rates that are used in global financial markets. It is published daily as the average of the rate certain banks pay to borrow unsecured money across five currencies (British Pounds, Euros, Japanese Yen, Swiss Francs and US Dollars) and seven terms (overnight, 1-week, and 1, 2, 3, 6 and 12 months).

LIBOR has been widely used as a benchmark reference interest rate in the financial markets for many years. It is often used in financial products such as mortgages, loans, bonds, structured products and derivatives, among others. In addition, banks and other financial institutions use LIBOR for their own funding and capital needs.

The Financial Conduct Authority (the “FCA”), which is a financial regulatory body in the United Kingdom, has expressed concerns that the interbank market, which LIBOR is intended to reflect, is no longer sufficiently active or liquid to provide a truly representative interest rate. As such, the Financial Stability Board, which is an international body that monitors and makes recommendations to promote stability in financial markets, has advised that LIBOR should be replaced with other benchmark reference rates, including for example central bank base rates and Alternative Reference Rates (“ARRs”).

An example of a central bank base rate is the UK Bank Rate. This is the average overnight interest rate paid to commercial banks by the Bank of England to borrow money and is set to be an integral part of UK Monetary Policy.

ARRs are typically overnight interest rates based on active and liquid funding markets. ARRs are predominately low risk or risk-free rates with an overnight term. This differs from LIBOR, which has components of both term (1 month, 2 months, etc.) and bank credit risk.

ARRs include:
• GBP: “SONIA” (Sterling Overnight Index Rate)
• USD: “SOFR” (Secured Overnight Financing Rate)
• EUR: “ESTR” (Euro Short Term Rate)

SONIA is based on actual transactions and is the average rate that banks pay to borrow money from other financial institutions.

Our transition from LIBOR strategy may involve the adoption of a central bank base rate and/or one or more of the ARRs. Both the UK Bank Rate and SONIA may offer a reliable alternative to Sterling LIBOR. We will communicate our decisions on the transition from LIBOR strategy in due course.

Existing clients who wish to discuss any of the information in this document are encouraged to contact their Relationship Managers who will be happy to answer any queries. You may also find it helpful to contact independent professional advisors, such as accountants or lawyers, for a further understanding of what the transition from LIBOR could mean for you. If you are not yet a client of AUBUK, you may contact us directly through our website.