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Easing the Swap Market’s Transition from LIBOR to SONIA

| Derivatives
Bhas Nalabothula
Bhas Nalabothula
Managing Director, Head of U.S. Institutional Rates, Tradeweb

With less than two years to go before the London Interbank Offered Rate (LIBOR) loses its regulatory support, UK debt and derivatives markets are accelerating their transition to the Sterling Overnight Index Average (SONIA) as the benchmark risk-free rate (RFR). SONIA, which was first introduced in 1997, is already widely used in the derivatives market and has been gaining traction in the GBP cash markets.

Estimated at $350 trillion globally on a gross notional basis, LIBOR is embedded in most firms’ operating models, so shifting to alternative rates presents several challenges to financial markets globally. Market participants have to review and amend contracts that currently reference LIBOR and mature after 2021. They also have to consider the use of fallback provisions, if a replacement rate is not identified.

However, the work undertaken by the Bank of England, the Financial Conduct Authority (FCA) and the Working Group on Sterling Risk Free Rates has helped steer the pace of the transition in the UK. In a recent statement, the Working Group announced it had identified 2 March 2020 as an appropriate date to move the greater part of new sterling swaps trading to SONIA.

At Tradeweb, we’ve been both supportive and actively involved in the transition from LIBOR to alternative reference rates. We already have 19 market makers providing liquidity in SONIA swaps, including streaming quotes for instruments with tenors ranging from one week to 50 years. In January 2020, we saw SONIA-linked trading activity exceed GBP 360 billion across 1300 swaps and from 2nd March, SONIA will become the benchmark for GBP interest rate derivatives on our platform.

Clients are able to send trade enquiries to multiple dealers, putting them in competition to price orders via our request-for-quote (RFQ) or request-for-market (RFM) protocols. They can also upload their existing GBP LIBOR portfolios directly into our list trading tool and convert them into SONIA in a streamlined process that helps them achieve best execution. Last year, more than 600 portfolios combining SONIA with GBP LIBOR swaps were traded on our interest rate derivatives platform.

Tradeweb is committed to providing the marketplace with price transparency and flexible execution methods for the new RFRs globally. Similar to SONIA swaps, our Secured Overnight Financing Rate (SOFR) and Euro Short-Term Rate (€STR) offerings are live, helping our clients to ease the transition to a world without IBORs.