Introduction to the Second Edition

Paul Newson

Since 2017, the world of interest rate risk has witnessed a number of developments that now merit some revision and update to the first edition. Probably most obvious has been the decision by regulators to phase out, from 2021, Libor and its equivalents, and replace them with overnight benchmarks such as the Sterling Overnight Index Average (Sonia) in the UK and the secured overnight funding rate (SOFR) in the US. This does not materially alter the fundamentals of IRRBB, but has necessitated considerable reworking of certain portions of the text, particularly those with numerical examples that used Libor as the risk-free benchmark rate. In addition, a new section has been added on Libor transition itself: while the immediate practical challenges this poses to banks will shortly become “history”, the story of the demise of Libor should continue to be relevant for an understanding of what a risk-free rate actually is.

The chapter on regulation has also been significantly updated. The 2016 Basel Standards on IRRBB are finally being implemented – largely in their entirety – by most national regulators, with the noticeable exception (so far) of the US. The issue is now not so much

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