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LIBOR Jargon Buster

  • Alternative Reference Rate Committee – a US committee comprised of a group of private market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York, to identify and help to ensure a smooth transition to an alternative USD reference rate, for use primarily in derivative contracts.
  • Amendment approach – an approach to facilitate amendments to documents that continue to reference IBORs once it is clear how the relevant RFR will be calculated, or once LIBOR has ceased to be published. 
  • Backward-looking overnight rate – a rate that is calculated by reference to historic transaction data and published on an overnight basis.
  • Backward-looking term rate – a rate that is known or realised after the beginning of an interest period. 
  • Compounded/averaged in advance – method of calculating interest which involves compounding/averaging a RFR over the period preceding the interest period to produce a rate which is known in advance.  The rate is consequently known at the start of the interest period. 
  • Compounded/averaged in arrear – method of calculating interest which involves compounding/averaging a RFR over an interest period or an observation period to produce a backward-looking rate.  The rate is consequently only known when it becomes due, or a few days prior to it becoming due, if a Lookback is used. 
  • Compounding the balance – the method of calculating compound interest by applying the daily RFR to each of the principal balance and accrued accumulated unpaid interest on a daily basis. 
  • Compounding the rate – the method of compounding the daily RFR to produce a rate for the period by applying the RFR compounding formula to the RFR only, and applying the compounded rate to the principal to calculate the interest due. 
  • Cost of funds – the interest rate paid by financial institutions on borrowing funds for the loans they provide to their borrowers. 
  • Credit Adjustment Spread – a mechanism which aims to redress the economic impact of the transition away from LIBOR to a RFR, to assist parties to a loan agreement which is transitioning in avoiding a value transfer. 
  • EFFR (Effective Federal Funds Rate) – a volume weighted median of rates on which depository institutions lend reserve balances to other institutions overnight on an uncollateralised basis. 
  • EONIA (Euro Overnight Index Average) – a benchmark rate that reflects the rate at which banks in the European Union and European Free Trade Area lend funds in euro in the interbank money market. Calculated as the sum of €STR and a fixed parameter (spread) of 0.085% (8.5 basis points). This benchmark is due to be discontinued. 
  • €STR (Euro Short-Term Rate) – a RFR administered by the European Central Bank that reflects the wholesale euro unsecured overnight borrowing costs of euro-area banks.  Developed as a replacement for EONIA and possibly a replacement for EURIBOR (although there are no immediate plans to discontinue EURIBOR). 
  • EURIBOR (Euro Interbank Offered Rate) – a daily reference rate based on the average rate for a given period at which a large panel of European prime banks lend to and borrow funds from each other in the Euro interbank market.
  • Exposure Drafts – documentation published by the LMA in respect of the LIBOR transition, open for comment from market participants.
  • Fallback language – documentary or contractual language which refers to what would take the place of LIBOR (or another benchmark) from a contractual perspective in the event such benchmark were no longer suitable, discontinued or no longer available to use. 
  • Floating Rate Note (FRN) – a debt instrument in a tradeable form with a variable interest rate.  The applicable interest rate is equal to a reference rate (typically IBOR) plus a quoted margin. 
  • Forward-looking term rate – a rate for an interest period known or realised at the start of that period. 
  • Hardwired approach – the approach to fallback language whereby the triggers for switching to a RFR are clearly set out, and the RFR to be adopted is identified.  Current forms of hardwired language would require documentation to be further amended to operate with the relevant RFR- based or other successor rate.
  •  Hedge accounting – a method of accounting where entries to adjust the fair value of the hedging instrument and the hedged item are treated as one, in order to reduce volatility created by the changes in value of the hedging instrument at different points during the sales cycle.
  • IBOR (Interbank Offered Rate) – a benchmark rate at which banks borrow and lend to each other in the Interbank market.
  • Interbank market – a global network used by financial institutions to trade currencies, loans and other financial instruments between themselves.
  • LIBOR (London Inter-Bank Offered Rate) – an interest rate benchmark intended to reflect the average rate at which banks can obtain unsecured funding in the London Interbank Market.
  • LIBOR or EURIBOR floor – A floor the parties to a loan agreement agree contractually will apply, in the event LIBOR or EURIBOR falls below a specified rate. 
  • Lag or Lookback without observation shift a lookback convention that weights the relevant interest rate according to the number of days in the interest period to which the calculation is relevant.  On most days, the weighting will be one, but on for a Friday it will generally be 3, and it will also be larger than 1 on the business day before a holiday.  The use of “lookback without observation shift” is the approach recommended for the sterling loan market by the UK’s Risk Free Reference Rate Working Group.  Lag can also refer simply to the concept of an Observation Period “lagging” the actual interest period by a number of days or number of business days.  
  • Lock-out – a mechanism for calculating the compounded RFR for a specified interest period, calculated over the relevant interest period, but which, for the purposes of the calculation, locks the daily rate a specified number of days from the end of the interest period at the then rate, and then repeats it for the final few days of the interest period.  The compounded average RFR for the interest period can therefore be ascertained on the day the rate is locked. 
  • Lookback – a mechanism used to calculate the interest payment due in which the Observation Period for calculation of the interest rate starts and ends a number of days prior to the interest period.  The rate will be calculated over the interest period itself, but for each day in the interest period, the rate used is that from the relevant number of days before.  
  • Lookback with observation shift – a lookback convention that provides for the rate to be calculated and weighted by reference to the Observation Period rather than the relevant interest period. The concept of a lookback with observation shift is used in the SONIA Compounded Index and in the sterling derivatives market. It was also the preferred approach in the US dollar loan and bond markets. 
  • Lookback without observation shift – see “Lag” above. 
  • OBFR (Overnight Bank Funding Rate) – a measure of wholesale, unsecured, overnight bank funding costs, calculated as a volume-weighted median of overnight federal funds transactions, Eurodollar transactions and certain domestic deposits. 
  • Observation Period – the period over which a compounded RFR applicable to any loan is calculated, operated by reference to a specified Lookback which determines the first and last day of the period. 
  • Overnight Indexed Swap (OIS) – an interest rate swap agreement in which a fixed rate is swapped against a pre-determined published index of a daily overnight reference rate (such as SONIA) for a fixed period.
  • Replacement of Screen Rate Clause – published by the LMA, with the aim of permitting parties to a loan agreement to make amendments to facilitate the inclusion of a replacement benchmark with a lower consent level than would otherwise be required. 
  • Repo (Repurchase Agreement) – a form of short-term borrowing for dealers in government securities. 
  • Repurchase market – a short-term money market for buying and selling securities in which one institution sells a financial product to another institution with an agreement (Repo) to repurchase it at a later date.
  • Risk-Free Rate (RFR) – a rate of interest used as a benchmark in financial transactions, measuring overnight borrowing costs in interbank unsecured lending markets or repurchase markets.  Designed to exclude counterparty credit risk and account solely for economic factors.  Considered to be more robust and less open to manipulation than current benchmark rates.
  • SOFR (Secured Overnight Financing Rate) – a secured interbank overnight benchmark rate used to price U.S. dollar-denominated loans and derivatives.
  • SOFR Averages – compounded averages of SOFR over rolling 30-, 90- and 180- calendar day periods.
  • SOFR Index – an index measuring the cumulative impact of compounding SOFR on a unit of investment over time.  The index value reflects the effect of compounding the SOFR each business day and allows the calculation of compounded SOFR averages over custom time periods. 
  • SONIA (Sterling Overnight Index Average) – an overnight interest rate used for unsecured lending in the interbank British sterling market.
  • SONIA Compounded Index – a daily SONIA compounded index, to be published by the Bank of England from August 2020, aiming to simplify the calculation of compounded interest rates and to support the use of SONIA in financial products.
  • Switch mechanism – a set of clauses in a loan agreement which provide for an in-built switch from LIBOR to a RFR upon a specified trigger.  The clauses provide the mechanics and terms for use of that RFR and if used avoid the need for any further amendment process.  A form of fallback language which can be contrasted with the Hardwired approach.
  • Term SOFR – a forward-looking term rate based on the SOFR derivatives market.
  • TSRR (Term SONIA Reference Rate) – a term benchmark based on SONIA.
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