Understanding IBORs and the transition to ARRs

Please be informed that many Interbank Offered Rates (IBORs) will cease to exist by the end of 2021. Therefore some interest rate benchmarks which fall under IBOR – including the London Interbank Offered Rate (LIBOR) will shortly be phased out.

What are IBORs?

Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR), serve as widely accepted benchmark interest rates that represent the cost of short-term, unsecured, wholesale borrowing by large globally active banks. IBORs have been used to calculate our overnight funding charges on index and share positions.

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a measure of the average rate at which banks are willing to borrow wholesale unsecured funds. It is administered by ICE Benchmark Administration.

It is calculated based on submissions from selected panel banks and is published in five currencies and a range of tenors.

How are IBORs changing?

IBORs have been used to calculate the overnight funding charges on our index and share positions. On 1 December we replaced some of these with Alternative Reference Rates (ARRs) and a spread adjustment, therefore going forward you’ll be charged fees according to the adjusted ARR benchmark +/- an admin fee.

ARRs are risk-free rates, therefore don’t incorporate the credit risk that is fundamental in the calculation of IBORs, which are based on Interbank lending over longer time periods.

Each currency has their own ARR as follows:

CCY CURRENT BENCHMARK ARR
GBP GBP LIBOR SONIA
USD USD LIBOR SOFR
EUR EUR LIBOR ESTR
CHF CHF LIBOR SARON
JPY JPY LIBOR TONA
SGD SIBOR SORA

We will be adjusting the ARRs by the one-month spread adjustment to compensate for the missing credit risk as proposed by the International Swaps and Derivatives Association (ISDA).

ARR  TENOR SPREAD ADJUSTMENT %
GBP 1 Month 0.0326
USD 1 Month 0.11448
EUR 1 Month 0.0456
CHF 1 Month -0.0571
JPY 1 Month -0.02923

If you have any questions, please do not hesitate in contacting our London Client Management team at [email protected] or 020 (3)771 5453.