Alright, so let’s break this down. LIBOR used to be this super-important number that told banks how much to charge each other for loans. But guess what? LIBOR is gone now because it wasn’t always accurate and could be manipulated. Instead, we’ve got these new, better numbers called risk-free rates (RFRs) like SOFR (for the US) and SONIA (for the UK). These are based on real transactions, so they’re way more reliable.
If you’re into spread betting, this change matters because it affects things like funding costs, pricing, and even your strategies. Let’s dive in and keep it simple.
What Was LIBOR, and Why Is It Gone?
LIBOR was used to calculate interest rates for all kinds of financial stuff. But here’s the problem: banks were just guessing these rates instead of basing them on actual trades. That made LIBOR easy to mess with, so they replaced it with RFRs, which are way more legit because they’re based on real market data.
The New RFRs:
- SOFR (US)
- SONIA (UK)
- €STR (Eurozone)
- TONA (Japan)
- SARON (Switzerland)
How Does This Affect Spread Betting?
When you’re spread betting, you’re often using leverage (basically borrowing money to make bigger bets). That means you’ll pay a fee for holding positions overnight, and that fee used to be tied to LIBOR. Now it’s tied to these new RFRs.
1. Overnight Funding Costs
If you keep a bet open overnight, your broker charges you a small fee. This fee used to be LIBOR + a markup. Now it’s an RFR + a markup. The good news? RFRs are usually lower than LIBOR, so you might pay less.
Example:
- Before: LIBOR = 1.5%, Broker Fee = 2%, Total = 3.5%
- Now: SOFR = 0.8%, Broker Fee = 2%, Total = 2.8%
2. Spread Betting on Interest Rate Products
If you bet on things like bonds or interest rates, their prices now follow RFRs instead of LIBOR. The prices might behave a little differently, so keep an eye out.
Example: Betting on 10-Year US Treasury Yields
Let’s say you’re betting on 10-year US Treasury yields. Because SOFR reflects secured overnight borrowing, it might feel a bit different compared to the old LIBOR-based pricing.
- Before (LIBOR-based):
- If you were betting on 10-year Treasury yields, the price might reflect LIBOR expectations for credit risk over the term. Pricing could shift significantly in response to changes in interbank lending sentiment.
- Now (SOFR-based):
- With SOFR as the basis, the price reflects secured overnight borrowing costs, making it more directly tied to Treasury market dynamics rather than interbank credit concerns.
- This shift could lead to slightly less volatility in pricing because SOFR is more stable than LIBOR.
3. Forex (Currency) Spread Betting
For forex trades, holding positions overnight involves rollover fees. These used to be tied to LIBOR, but now they’re based on RFRs for each currency.
Example: If you’re trading GBP/USD:
- Before: Fees were based on GBP LIBOR and USD LIBOR.
- Now: Fees are based on SONIA (GBP) and SOFR (USD).
Good news again – RFRs are usually cheaper, so rollover costs might go down.
4. Shop Around for Competitive Rates
Not all brokers are equal. Some charge higher overnight fees even with the new RFR system. Look around to find a broker with fair funding costs and tight spreads. It could save you a lot of money in the long run.
5. More Transparency
One of the cool things about RFRs is that they’re based on real trades, not estimates. This makes fees more predictable and harder to mess with.
Example: If you’re betting on the FTSE 100 index, your overnight charges now reflect real-world rates like SONIA instead of old-school LIBOR guesses.
What Should You Do Now?
Understand Your Broker’s Fees: Compare Brokers for Better Rates
Ask your broker how they calculate funding costs now that LIBOR’s gone. If their fees seem high, maybe it’s time to shop around.
Some popular brokers, like Plus500 and eToro, are known for charging higher financing fees. It’s a good idea to compare brokers carefully to avoid paying more than necessary. Always check their overnight charges and spreads before committing to a platform.
Look around to find a broker with fair funding costs and tight spreads. It could save you a lot of money in the long run.
Learn About the New RFRs
Here’s the deal:
- If you’re trading anything in USD, keep an eye on SOFR.
- For GBP trades, check out SONIA.
- For EUR, watch €STR.
Knowing these will help you make smarter bets.
- USD LIBOR → SOFR (Secured Overnight Financing Rate)
- SOFR is administered by the Federal Reserve Bank of New York.
- It reflects the cost of borrowing cash overnight, collateralized by U.S. Treasury securities.
- Unlike LIBOR, it is based on actual transactions in the U.S. Treasury repo market.
- GBP LIBOR → SONIA (Sterling Overnight Index Average)
- SONIA is administered by the Bank of England.
- It reflects the average of overnight unsecured borrowing rates in the sterling market.
- EUR LIBOR → €STR (Euro Short-Term Rate)
- €STR is administered by the European Central Bank (ECB).
- It represents overnight unsecured euro borrowing costs in the eurozone.
Adjust Your Strategies
Lower funding fees mean holding positions overnight might be cheaper now. That could change how you plan your trades. Just make sure you understand how your costs work with the new rates.
TL;DR (Too Long; Didn’t Read)
- LIBOR is out. RFRs like SOFR and SONIA are in.
- Overnight fees for spread betting are now tied to RFRs, which are usually lower and more transparent.
- Shop around! Some brokers charge more than others.
- Learn how these new rates affect your trades and plan accordingly.
With these changes, you’ve got a great chance to save money and maybe even find new opportunities. Keep learning, stay sharp, and happy trading!
