Regulators have long promoted, as a replacement for LIBOR, compounded risk-free rates (RFRs), where the interest rate and amount of interest payable are only known at the end of the interest period. However, in both the UK and the US, regulators have also recognised the need for forward-looking RFRs in sectors such as trade finance. While it is expected that 90% of market transactions will use RFRs compounded in arrears, the need for certainty at the outset of a transaction in the trade finance sector will undoubtedly lead to the use of forward-looking RFRs in loan documentation, as well as for the calculation of discount rates applicable in relation to, for example, receivables financing transactions where the rate must be known to determine the final amount to be paid to the customer.
The guidance note looks at Term SOFR (SOFR is the Secured Overnight Financing Rate), the ARRC recommended RFR term rate available for US dollars, and Term SONIA (SONIA is the Sterling Overnight Index Average) and Term SONIA Reference Rate (TSRR), the RFR term rates for Pounds Sterling, highlighting issues to consider when entering into new transactions, including a reminder on timing for each. The Schedule sets out key facts for each of the RFR term rates for US dollars and Pounds Sterling in turn. This guidance note does not cover RFR term rates for euros in any detail as these are at a much earlier stage in the process of reform.