Financial spread betting and CFD brokers we will transition from using the Interbank Offered Rates (IBORs) to the new interbank benchmark risk-free rates (RFRs). They are doing this as most IBOR rates will cease to exist by the end of 2021. This change will affect how they calculate overnight fees on most of the products.
What are IBORs and why are they changing?
IBORs are widely accepted interest rate benchmarks used in financial markets. However, concerns over sustainability and viability led to regulators confirming that most IBOR rates will cease to be produced by the end of this year.
What will they be replaced by?
IBORs will be replaced with Risk-Free Rates (RFR). These are less volatile and more resilient in comparison, as they are based on more active and liquid overnight interest rates in wholesale markets. Plus, RFRs don’t include the credit risk associated with IBORs. To adjust for the missing credit risk, they will be adjusting the RFRs with the one-month spread adjustment proposed by the International Swaps and Derivatives Association (ISDA).
How this affects your trades
Each currency will have an alternative rate:
• GBP – SONIA
• USD – SOFR
• EUR – ESTR
• CHF – SARON
• JPY – TONA
• SGD – SORA
This transition will affect how brokers calculate overnight fees on their products – not including futures contracts and zero commission stock CFDs. Check with your broker when you’ll be charged according to the reference RFR benchmark, as well as the adjustment from ISDA. Please note that a material change to overnight holding costs is not expected as a result of these changes.
What is going to be affected: all spread betting accounts, regulated forex brokers, and top CFD trading providers.
Technical Stuff: IBOR and RFR
LIBOR rates are derived from an average of submissions by panel banks. The underlying market that LIBOR seeks to reflect has become increasingly less active. Therefore, given the decrease in transactions, the Financial Stability Board (FSB) has observed that submissions used to determine LIBOR are increasingly based upon expert judgment. In 2017, Andrew Bailey, the Chief Executive of the United Kingdom’s Financial Conduct Authority (FCA), which oversees LIBOR, announced that the FCA would no longer persuade or compel member panel banks to make LIBOR quote submissions after 2021 and that market participants should expect LIBOR to be subsequently discontinued, or at least to no longer be deemed representative.
Risk Free Rates (“RFRs”) are alternative reference rates that have been developed for use instead of LIBOR.
While RFRs and LIBOR are both benchmarks, there are distinct differences between them which include:
1. Reference Period: LIBOR is a forward–looking term rate whereas RFRs are backward–looking overnight rates.
2. Methodology: LIBOR is derived from quotes provided by panel banks’ submissions that are meant to be estimates of where they could borrow funds whereas RFRs are benchmarks generally based upon a broader range of actual transactions.
3. Credit Risk: LIBOR and RFR rates reflect different elements of credit risk. LIBOR is an unsecured borrowing rate and includes the implied credit risk of the panel banks and a liquidity premium related to the length of the interest period. RFRs do not include the panel bank credit risk element nor a liquidity premium related to the length of the interest period as they are overnight rates. Some RFRs are unsecured and others are secured.