Sterling RFR Working Group Summary Papers
On 16 October, the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”) announced the publication of two documents in their ongoing work to inform and ease the path of transition from IBORs. The papers summarise the current position in relation to two resources: the beta versions of Term SONIA Reference Rates (“TSRRs”) and risk-free rate (“RFR”) calculators.
Summary of Beta Term SONIA Reference Rates
For some time, the RFRWG has acknowledged that a relatively small number of participants in the cash markets and certain legacy contracts are likely to need a forward-looking term reference rate. This led to their consultation in 2018 into a Term SONIA Reference Rate. At present, three benchmark administrators have published free-to-use TSRRs in “beta” form for review and the RFRWG’s October “Term SONIA Reference Rate Publication Summary” gives a high-level overview of these TSRRs’ key attributes and links to the beta TSRRs.
This summary of the beta TSRRs gives an insight into the varying methodologies emerging in relation to compounded SONIA; in this case, the sources of data being used to calculate the providers’ beta TSRRs differ in some respects. Notwithstanding the availability of these beta TSRRs, the intention of the RFRWG remains that the market adopt a transition to SONIA compounded in arrears in all but a limited number of cases, which has become an increasingly realistic goal as institutional derivative and cash product markets (in particular, the bond and securitisation markets) have already widely adopted the SONIA compounded in arrears reference rate.
Summary of Independent RFR Calculators
The second summary published by the RFRWG sets out a table of the independent RFR calculators that are currently available to access without charge. As the summary points out, there are other RFR calculators in the market for which users must pay a fee but which might fit the requirements of the participant better.
Calculation of a compounded rate can be complex and a key objective of these RFR calculators is to help calculate and/or validate the amount of interest due when a rate is based on SONIA compounded in arrears. In addition to providing a useful update to market participants and vendors of the development of RFR calculators, the summary also acts as a timely reminder that some of the complexity around calculating compounded rates stems from the fact that consensus on the conventions used is yet to be reached across financial markets and within some of those markets themselves. This is reiterated by the fact the methodologies used in the RFR calculators vary; for example, two of the three calculators referred to in the RFRWG’s summary currently provide the option of seeing both the observation lookback (sometimes referred to as the “lag” method) and the observation shift convention.
What Is the Aim of These Summaries?
These latest summary papers from the RFRWG join the array of documents aimed at ensuring market participants and vendors are up-to-date with the latest developments and resources in relation to the move away from using certain IBORs. Their objective is to ensure participants are aware of the availability of these resources, and that they have the information they need to consider whether any amendments may be required to their systems or products if they choose to adopt SONIA compounding methods or transition to TSRRs (where such transition is appropriate and the TSRRs are available for use). They are also a useful reminder that there is still work to be done in reaching a landing on the methodologies and conventions used when replacing IBORs with an RFR.
 Summary of responses for the consultation on SONIA term rates, RFRWG, November 2018.
 For more discussion of how the “lag” and “shift” conventions differ, see our previous Eye on IBOR Transition blog post, An Update on Interest Rate Conventions in the SONIA-Linked Floating Rate Note Markets.