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Accounting for change with the libor transition

With the London interbank offered rate being replaced with the sterling overnight index average (or, SONIA), John Mongelard looks at the impact of the Libor transition on hedge accounting

A field covered in golf holes each with its flag, one of whom has the word 'Profit', another 'Buy', another 'Sell', etc. The London interbank offered rate (Libor) is dubbed by some as the most important number in financial markets. It is used and perhaps overused for pricing, valuations, accounting, models, third-party contracts and risk systems.

The imminent change to Libor and its replacement with overnight rates – such as the sterling overnight index average (SONIA) – will be far-reaching. It will be more than a ‘find and replace’ task. This is because the replacements are very different in their construction to Libor. Unfortunately, the standard setters and markets are not replacing like for like, so the changes will have practical consequences both now and when we move to new rates after 2021.