Q&As

What options are there when selecting a reference rate for loans?

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Published by Onyinyechi Nwanna of
Last updated on 08/10/2021

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • What options are there when selecting a reference rate for loans?
  • What are the key options for Sterling loans?
  • What are the key options for USD loans?
  • What are the key options for loans in Euro?
  • What are the key options for loans in Japanese Yen?

What options are there when selecting a reference rate for loans?

With LIBOR due to be discontinued or become unrepresentative in most currencies and tenors at the end of 2021, market participants must now use other reference rates in loan agreements and other contracts.

This Q&A suggests reference rate options for new loan agreements and those legacy loan agreements that are to be amended. For tough legacy contracts (ie those that can’t be amended), the EU, US and UK have all put forward different legislative solutions to ensure contract continuity, though the solutions won’t be available for all legacy contracts. Practice Note: LIBOR transition—legislative solutions to tough legacy contracts discusses these solutions in detail and when they apply.

What are the key options for Sterling loans?

SONIA, compounded in arrears: SONIA, compounded in arrears, is expected to be suitable for use in the vast majority of cash products. There are various possible compounded methodologies—see Practice Note: What are the key considerations when drafting a compounded-RFR based loan agreement? The ICE RFR Indexes, published by ICE Benchmark Administration, were developed to help address the key operational considerations of lenders and borrowers of RFR-based loans and can be used to calculate compound interest between any two index dates.

Term SONIA: As a forward looking term rate, Term SONIA is likely to be most used in loan agreements where a forward looking

Related documents:
Key definition:
Loans definition
What does Loans mean?

Occupational pension scheme resources may not at any time be invested in an employer-related loan. In accordance with section 40 of the Pensions Act 1995, employer-related loans are: loans to the employer or any such person; shares or other securities issued by the employer or by any person who is connected with, or an associate of, the employer; or employer-related investments eg a guarantee or security for obligations of the employer. This does not apply in respect of small self-administered schemes (SSASs) and self-invested pension plans (SIPPs).

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