A major international bank is providing a 7-year syndicated loan to an Indian multinational corporation (MNC) that operates extensively in the UK market. The loan is denominated in GBP (British Pounds). The bank is required to use the risk-free rat e (RFR) for the GBP market, as per global regulatory standards for reference rate transition. Which of the following is t he mandated replacement reference rate for GBP LIBOR (London Interbank Offered Rate), and what is its key characteristic that addresses the primary failure point of the original LIBOR?

Question

Accepted Answer

SONIA (Sterling Overnight Index Average). Key Characteristic: It is derived from actual, observable transactions in the unsecured overnight wholesale funds market, thereby removing the reliance on expert judgme nt (contributions) and reducing manipulatio n risk.

Answer

EURIBOR (Euro Interbank Offered Rate). Key Characteristic: It is a pan-European rate that incorporates a full liquidity premium, making it safer than the national rate.

Answer

TONA (Tokyo Overnight Average Rate). Key Characteristic: It is based on term-lending transactions, providing a forward-looking rate for pricing the entire 7-year loan immediately.

Answer

SOFR (Secured Overnight Financing Rate). Key Characteristic: It is derived from the unsecured interbank lending market with a credit risk component, making it reliable for hedging.

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