5 min read 15 Aug 22
You may not have heard of LIBOR (or the London Interbank Offered Rate, to give it its full name) before. But LIBOR, once described as ‘the world’s most important number’, is an interest rate that was widely used by financial institutions until it was replaced by an alternative rate, SONIA (Sterling Overnight Index Average), at the end of 2021.
Although we’ve already identified the funds that were affected by the changes to LIBOR, and our impacted products completed the transition to SONIA at the end of 2021, you can find answers below to some of the questions you may have about the changes that took place:
LIBOR and the other IBORs (Interbank Offered Rates) are families of interest rates at which banks are prepared to lend money to each other as they need it.
The rates have been a mainstay of financial markets for more than three decades, and were provided for a number of currencies and across a number of defined time periods. Each rate was calculated based on quotes provided by a panel of banks for a number of major currencies.
Many financial contracts referenced one or another LIBOR rate as their benchmark – for determining interest payments, for instance. This included certain types of bonds, where the value of the asset or the cashflow it generated was specifically linked to LIBOR or another IBOR.
LIBOR and similar IBORs have been replaced, or if not, reformed. In most cases, the replacement rates are highly regarded interest rates that are already in widespread use.
In the UK, sterling LIBOR was replaced by SONIA, the Sterling Overnight Index Average. An industry-wide consultation determined that SONIA represented the most appropriate way to replace LIBOR for the sterling market.
Financial regulators want standard measures of market interest rates to be trusted and relevant, and for the process used to calculate them to be credible, transparent and robust for the long term. In recent years, the reliability of the process of setting those rates had been under pressure so financial regulators globally sought to improve that.
Whereas LIBOR was derived from quotes provided by a panel of banks, regulators want benchmark rates to be both administered by central banks and based on large numbers of transactions.
SONIA (the Sterling Overnight Index Average rate) is an interest rate that was already in widespread use in many areas of the financial markets and was widely regarded as a reliable market standard for interest rates in day-to-day use. It's published and administered by the Bank of England.
SONIA is based solely on actual transactions that took place the previous business day, on an overnight basis. It therefore applies for only one business day and is backward-looking. LIBOR, by contrast was forward-looking, with rates set at the start of different, though standardised, periods such as one month or six months.
LIBOR stopped being published at the end of 2021 and has now been replaced by SONIA for the sterling market.
M&G put in place significant resources to make the transition to SONIA, and other replacements for IBORs, as smooth as possible and with minimal effect on our clients. The M&G project team focused on:
There are two main ways that M&G’s retail funds were affected by the change from the existing LIBOR rate.
Firstly, where a fund held investments where the value of assets, or cashflows they generate, were specifically linked to LIBOR or another IBOR. Such assets included floating rate notes or asset-backed securities that several of our fixed income funds invested in, for instance. These funds have now moved to holding new assets that are linked to the replacement interest rates.
Secondly, where a fund has a performance benchmark, or an objective, that was linked to a LIBOR interest rate or another IBOR. This included some of our funds that targeted an absolute return (and which therefore did not reference a benchmark). In these cases, we've changed the performance benchmark, or the rate stated in the fund’s objective to a suitable alternative.
Our approach to the change from LIBOR to SONIA differed by fund, as it depended on the rules that govern changes to our products.
In some cases, we obtained prior client consent to the changes we made, which was achieved through a shareholder resolution. Where prior consent wasn't required, we communicated details of changes in advance of them taking place, as appropriate.
The views expressed here should not be taken as a recommendation, advice or forecast.
The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.