From NIBOR to NOWA – new consultation paper from the Norwegian working group
As work continues in establishing an alternative to NIBOR, the Norwegian working group has made recommendations in relation to term adjustment, spread adjustment and trigger events for a transition from NIBOR to NOWA. Market participants are encouraged to get involved and provide feedback.
Reference rates are used in a wide variety of transactions as a basis for calculating interest payable, yield and other economic metrics and is meant to measure the interest rate level a bank requires for unsecured money market lending in NOK to another bank. NIBOR (Norwegian Interbank Offered Rate) is calculated as a simple average of the interest rates submitted by the NIBOR panel banks for each maturity (one week, one month, three month etc.).
The Norwegian working group on alternative reference rates in NOK (ARR) has continued the work it started in 2019 to explore alternatives and consequences of a discontinuation of NIBOR. Last year it recommended a modified NOWA as the alternative reference rate for NIBOR, which from 1 January 2020 is being administered by Norges Bank.
NOWA (Norwegian Overnight Weighted Average) is a wholly transaction based overnight rate, based on the average of interest rates for unsecured loans between banks in the Norwegian overnight market.
Working group recommendations
In 2020, ARR continued its work by establishing two subgroups:
- A group for market standards and fallback solutions and
- A group for exploring the establishment of an Overnight Index Swap (OIS) market in NOK
Sub group 1 published on 28 September 2020 a further consultation paper on fall back options and term and spread adjustments between NIBOR and NOWA upon a discontinuation of NIBOR.
The report discusses three key issues pertaining to a possible transition from NIBOR to NOWA:
- Term adjustment: How to handle the differences in term between NIBOR and NOWA, given that NIBOR is available with terms ranging from 1 week to 6 months and NOWA is by its nature an overnight interest rate.
Consultation paper recommendation: The consultation paper recommends using the daily compounded NOWA rate with a 2 day observation shift multiplied by 360/365.
- Spread adjustment: Methods for calculating the differences between NIBOR and NOWA, ie calculating the spread.
Consultation paper recommendation: The consultation paper recommends using a spread adjustment factor which is the 5 year median difference between the compounded Nowa interest rate with a 2 day observation shift, and Nibor.
- Trigger events: What events should trigger a transition from NIBOR to NOWA?
Consultation paper recommendation: The consultation paper recommends a transition to NOWA if a public announcement from relevant authorities has been made that NIBOR will not cease to be published and/or the administrator of NIBOR shall cease to provide NIBOR and there is no successor administrator in place.
Market participants are encouraged to provide feedback to the consultation paper. The final report and recommendation is expected at the end of Q4 2020.
By Snorre Lyse, Partner Schjødt, and member of the subgroup on market standards and fallback solutions.