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December 17, 2020
The LIBOR benchmark rate is the most important interest rate in the world, with more than USD 350 trillion of derivatives, loans or mortgages referencing this rate – and it will be replaced by the end of 2021 with alternative reference rates such as SOFR, SONIA, ESTER, SARON, or TONA. Since the proposed alternative rates are calculated differently, payments under contracts referencing the new rates will differ from those referencing LIBOR. This transition will change banks’ market risk profiles, require changes to risk models, valuation tools, product design and hedging strategies.