NatWest Markets Strategy & Sales

NWM: The not so linear LIBOR transition of the non linear market
Phil LloydJohn Stevenson-Hamilton
21 October 2020 17:28

Phil Lloyd
Head of Market Structure & Regulatory Customer Engagement
+44 20 7085 1271
John Stevenson-Hamilton
NWM Regulatory Impact
+44 20 76789596


If you wish to discuss the content of this article further, please contact your usual sales person. Reminder, clients of Natwest Markets NV should reach out to their relevant NV sales person.

With the ISDA Protocol path now set many are turning their attention to how the non linear market will cope with compounded SONIA + a spread fallback, and the future prospects in an RFR market. 


Produced by Phil Lloyd 


The ISDA protocol is a convenient, low cost mechanism to update large volumes of bilateral documentation. However it does have the disadvantage of treating all products the same way.  The treatment of non-linear products specifically deserves a closer look.


In this note we quickly review the main non-linear products and outline what we think still needs to happen to ensure a vibrant and liquid market in the new reference rates.  The Sterling RFR Non Linear Task Force is also wrestling with these points at the moment, and we are hopeful that they will publish some recommendations soon that the market can coalesce around.  


The way the fallback protocol works is that once you adhere, you adhere for all legacy trades that reference an IBOR in a range of documents.  If your counterparty also adheres, then the new fallback language is applied to all transactions between the two of you.  


There is no opt-out for particular products or specific transactions. ISDA envisages that counterparties will subsequently enter into bilateral amendment agreements to exempt certain trades or products, or override their treatment with better alternative(s).    

Caps / Floors

  • Caps and floors will transition to options on a rate only fully known at the end of the period, unlike legacy caps where it is known at the beginning of the period, an effect known as “maturity extension”.

  • The new (replacement) rate is a compounded rate, meaning options will essentially transition from being European to Asian for valuation purposes.

  • A lack of lag between fixing and payment may be an issue for some of the smaller clients.

  • The ISDA fallback transition, if not bilaterally re-negotiated, will result in a value transfer, primarily due to the maturity extension and Asian features.



  • Legacy swaptions reference ICE swap rates that are LIBOR based. There is a need for a transition formula for LIBOR swaps to SONIA swaps so physically-settled swaptions can continue to settle via the CCPs

  • A transition formula is also needed to produce synthetic LIBOR swaps fixing rates for cash-settled swaptions and any other CMS linked products.
  • Note the 'SONIA first' conventions switch on 27 October is expected to drive greater interbank liquidity towards SONIA which in turn may help liquidity in the swaptions market. 

Range accruals … in arrears / in advance  

  • The ISDA fallback language ensures that the product can still function technically, but its characteristics and valuation will be altered significantly. For example most if not all rates feeding the range accrual factor calculations will be the same rate (for the most standard variety of range accruals), being the compounded rate published just before the range accrual coupon payment date.
  • Value transfer and issues with more complicated valuations are present here as well.
  • It has been suggested that a better alternative could be to use term RFR rates as a replacement, such as a 1y CMS rate, but that can only be effected by bilateral agreement post-ISDA protocol adoption.


ICE Swap Rate

  • Banks need to consult with ISDA on a new fall-back procedure when for some reason the RFR swaps fixing rate is not available. This is not really transition related, but acknowledging the fact that reference rates from a panel of other banks don’t work.

  • In September the BoE wrote to ICE asking them to consider a SONIA based methodology to provide a 'synthetic' GBP LIBOR ICE Swap Rate (ISR) for use in legacy trades only.  ICE are already now publishing in beta testing mode a SONIA ISR.   


To read a more in depth study of some of the issues raised here please see the paper Interest Rates Benchmark Reform and Options Markets by our Head of Quantitative Analytics, Vladimir Piterbarg (free to access but requires registration).   


The non-linear taskforce is working hard to find that 'straight' path forward but pressure is mounting with the market looking to sign up over the next few months to a protocol that doesn't carve out such products.   


In the meantime, all eyes are on the ISDA website to see the pace of adoption of the protocol once it is launched on Friday 23 October. 



Phil Lloyd, NWM Sales  



Please click here to find all of NatWest Markets’ Strategy and Sales commentary/ideas. 

You can also find out more about our electronic offering and credentials for Rates here and for FX here  

This is Non-Independent Research, as defined by the Financial Conduct Authority. Not intended for Retail Client distribution. This material should be regarded as a marketing communication and may have been produced in conjunction with the NatWest Markets Plc trading desks that trade as principal in the instruments mentioned herein. All data is accurate as of the report date, unless otherwise specified. 


This communication has been prepared by NatWest Markets Plc, and should be regarded as a Marketing Communication, for which the relevant competent authority is the UK Financial Conduct Authority.

Please follow the link for the following information    

  • MAR Disclaimer
  • Conflicts of Interest statement
  • Glossary of definitions
  • Historic Trade ideas log

Where communicated in Singapore, this communication may be deemed an advertisement. This advertisement has not been reviewed by the Monetary Authority of Singapore.


This material is intended for your sole use and is provided to you on the understanding that, before entering into any transaction referred to in this material, and/or any related transaction (together, the “Transaction”), you will ensure that you fully understand the potential risks and return of the Transaction and determine whether the Transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. Nothing in this material constitutes an offer or invitation to enter into any engagement or transaction or an offer or invitation for the sale, purchase, exchange or transfer of any securities or a recommendation to enter into any transaction, nor is it intended to form the basis of any investment decision. None of NatWest Markets Plc, NatWest Markets N.V. (and/or any branches), NatWest Markets Securities Inc. and/or their affiliates (“NatWest Markets”) is soliciting any specific action based on this material. The material does not take into account the particular investment objectives, financial conditions, or needs of individual clients or whether any transaction is suitable for any particular investor. The remuneration of the author(s) is not directly tied to any transactions performed, or trading fees received, by any entity of the NatWest Group, for example, through the use of commission-based remuneration arrangements.


This material has been prepared by NatWest Markets and has not been prepared in accordance with the legal and regulatory requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of its dissemination. Any views expressed may differ from those of other business units of NatWest Markets. The opinions, commentaries, forecasts, assumptions, estimates, derived valuations and target price(s) or other statements contained in this communication (the “Views”) are valid as at the date and/or time indicated and are subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. Views expressed herein are not intended to be, and should not be viewed as advice or as a personal recommendation. The Views may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this material. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with the Transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and make such other investigations as you deem necessary including obtaining independent financial advice, before participating in any transaction in relation to the securities referred to in this document. This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information contained herein is confidential and may not be given (in whole or part) or otherwise distributed to any other third party without the prior written consent of NatWest Markets.


NatWest Markets and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this material and/or in related financial instruments giving rise to potential conflicts of interest which may impact the performance of such financial instruments. Such interests may include, but are not limited to, (a) dealing in, trading, holding or acting as market-maker or liquidity provider in such financial instruments and any reference obligations; (b) entering into hedging strategies on behalf of issuer clients and their affiliates, investor clients or for itself or its affiliates and connected companies; and (c) providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. NatWest Markets and its affiliates, connected companies, employees or clients may at any time acquire, hold or dispose of long or short positions (including hedging and trading positions) which may impact the performance of a financial instrument.    


This material may relate to over-the-counter derivatives (“OTC Derivatives”) in which case you should be aware that OTC Derivatives can provide benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (among other things) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place. Therefore you should also determine whether OTC Derivatives are appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.


If you enter into an OTC Derivative transaction and decide to close out the transaction, or the transaction otherwise terminates before its scheduled termination date, you may have to pay break costs. These will be calculated by reference to prevailing market conditions and include any costs incurred by NatWest Markets in terminating any related financial instrument or trading position. Please note that such break costs can be substantial. If you enter into an OTC Derivative transaction for the purposes of hedging a loan or other debt and you subsequently wish to repay the debt (whether through refinancing or otherwise), you should be aware that it may be necessary for NatWest Markets to terminate the hedging transaction before its scheduled termination date and satisfy any liabilities that you may have to it with respect to such transaction (including break costs) before NatWest Markets will release any related security that you have provided to it.


This material has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of this material, nor does NatWest Markets accept any obligation to any recipient to update, correct or determine the reasonableness of such information or assumptions contained herein. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.


In the U.S., this material, to the extent it relates to securities, is intended for distribution only to major institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934 as amended (excluding documents produced by our affiliates within the U.S. which are subject to the following disclaimer isclaimer/publication/2756). This material is not intended as an offer or the solicitation of an offer to buy or sell securities as defined under U.S. securities laws.


Notwithstanding the foregoing (but subject to any applicable federal or state securities laws), NatWest Markets and the recipient may disclose to any and all persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax analyses) relating thereto. IRS Circular 230 Disclosure: NatWest Markets does not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with NatWest Markets of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.


NatWest Markets Plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority and is provisionally registered as a swap dealer with the United States Commodity Futures Commission. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised by De Nederlandsche Bank and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. Agency agreements exist between different members of NatWest Group. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (, a SIPC member ( and a wholly owned indirect subsidiary of NatWest Markets Plc. NatWest Markets Securities Inc. is authorised by NatWest Markets Plc to act as its agent for certain kinds of its activities.



Copyright © NatWest Markets Plc. All rights reserved.