One of the main challenges of shifting from LIBOR is the switch from forward- to backward-looking rates. Industry groups are weighing up the merits of simple versus compound averaging to determine the best approach to make the overnight RFRs work for products that previously relied on a term rate. The Bank has been working with banks and other financial institutions since last year in an effort to improve their ability to manage interest rates over longer periods of time. Conventions being developed include a payment delay, lockout/suspension period, lookback/lag and other hybrid models. The BoE working group for RFRs prefers the lag convention.
One of the main challenges of shifting from LIBOR is the switch from forward- to backward-looking rates. Industry groups are weighing up the merits of simple versus compound averaging to determine the best approach to make the overnight RFRs work for products that previously relied on a term rate. Once the preferred methodology has been established, the operational issues of when and how interest is paid needs to be addressed. Conventions being developed include a payment delay, lockout/suspension period, lookback/lag and other hybrid models. The BoE working group for RFRs prefers the lag convention.