On 1 September 2020, the Working Group on Sterling Risk-Free Reference Rates published a statement outlining recommendations on conventions to support the use of Sterling Overnight Index Average (SONIA) in loan markets for Sterling Bilateral and Syndicated Facilities, including Multicurrency Syndicated Facilities where there is a sterling currency option.
The recommendations are intended to support the Working Group’s target for lenders to be ready to offer non-LIBOR loan products by the end of Q3 2020.
SONIA compounded in arrears remains the Working Group’s recommended alternative to Sterling LIBOR. The intent of these recommendations, which are non-binding, is to enable and expedite the transition away from the use of LIBOR based products for the loan market.
The recommendations in summary are as follows:
- Loan markets should now consistently move towards the implementation of SONIA using a compounded in arrears methodology.
- Use of a Five Banking Days Lookback without Observation Shift is recommended as the standard approach by the Working Group. However, where lenders are also able to offer lookback with an observation shift this remains a viable and robust alternative.
- Where an interest rate floor is used, the Working Group recognises that it may be necessary to apply the floor to each daily interest rate before compounding.
- That accrued interest should be paid at the time of principal prepayment.
The annex to the statement on pages 3-5 provide further details on the recommendations.
 Lookback without Observation Shift is also known as the Observation Lag convention.