Libor replacement to be given first bond issue test
The Bank of England’s replacement for the scandal-hit Libor interest rate is to take a major step forward as Lloyds Banking Group prepares to issue the first bonds tied to it.
Lloyds will become the first commercial lender to use Sonia, a three-year sterling benchmark floating rate covered bond with is tied to the Sterling Overnight Index Average from which its name is derived.
Lloyds’ Sonia sale is expected to take place this week. Peter Green, the company’s head of public senior funding and covered bonds, told Bloomberg: “It’s exciting to be the first bank to be looking at this type of transaction.”
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Sonia received its first big test earlier in the summer, as the industry pivots away from Libor, which has been tarnished by its links to a rigging scandal. In June, the first large-size Sonia bond sale was conducted by European Investment Bank (EIB), after a year of preparation prompted by the labour of creating new systems.
“That trade worked well so it makes sense to continue to keep that structure,” said Green, who described the EIB deal as a “forerunner” to that of Lloyds.
Earlier this year, the Bank of England introduced a series of reforms to Sonia, which they have administered since 2016.
Last year, officials said they will stop compelling banks to submit Libor quotes after 2021, winding down a mechanism that originated in the 1980s.
It was alleged that traders at several banks had conspired to fix rates by submitted false figure for borrowing costs, resulting in extended litigation and fines against several major banks. Only one person, former city trader Tom Hayes, has been convicted in relation to the scandal.