How OIS Rates Relate to Risk-Free Benchmarks and IBOR Fallbacks

# Difference between OIS Rate and Risk-Free Rate


# Difference between OIS Rate and Risk-Free Rate












What exactly is the difference between the fixed rate of an OIS and the risk-free rate in that currency. For example, in the US the OIS rate vs. risk-free rate SOFR or in the UK the OIS rate vs. the Sterling risk-free rate SONIA - don't the rates and the risk-free rate coincide?

In the context of the IBOR cessation / transition to risk-free rates, I've heard to SONIA discussed, but also fallback to a OIS rate. What is the difference?

I thought a RFR was determined by such the fixed rates of OIS transactions. I'd appreciate any help! Kind regards.

## Answer by Attack68 (score 5)

https://quant.stackexchange.com/a/58880

RFR (risk free rate) is the current acronym ISDA, central banks and regulators are pursuing to signify and politicise the transition from IBOR, which has been dogged by rigging scandals.

OIS (overnight index swap) is the acronym that has been associated with an unsecured overnight interbank cash lending rate fixing (OIS fixing) (with different calculation rules in different currencies), as well as in regard to the derivatives (swaps) that settled against compounded or averaged OIS fixings.

Some identified RFRs eg SOFR are now targeting collateralised repo transactions as their underlying data source in calculation. Since clearing houses use these rates for the collateral remuneration of the derivatives it makes sense to adopt a collateralised rate rather than an uncollateralised lending rate.

SONIA, and ESTR are outlined as the candidates for RFR in sterling and Euro even though it is still based on uncollateralised lending. I suspect these decisions are based on data availability in each currency as well as established processes that may already be fit for purpose.

After the cessation of IBOR, i.e. IBOR is no longer calculated and published in the old way, the designated RFRs in each currency will be used to derive IBOR rates for the purpose of settling legacy derivative contracts. In fact, RFRs, which represent overnight rates will be compounded over the relevant IBOR tenor and have a 'spread adjustment' applied to reflect the missing 'term credit risk' component. Bloomberg has been designated as the calculation agent and they have published documents about their processes on their website.

## Answer by demully (score 1)

https://quant.stackexchange.com/a/58897

Isn't the "Risk-Free-Rate" (RFR) just a rebranding of LIBOR/EURIBOR, as was? IE these are not "risk-free" so much as interbank, ie the "liquid benchmark for very-short-term very-low-risk".

Unless you work in the fixed-income department of an investment bank, the distinction is probably superfluous; so genuinely not worth worrying about. In simplest layman's terms, an OIS swap is us betting about overnight rates. I'm not lending or borrowing a billion; but we pay or receive a billion's worth of the difference to our agreed swap rate. If you go bust, I lose only this difference (maybe a few million). At LIBOR/RFR, I have lent or borrowed the billion from/to you, so the risk is the billion itself. Simplifying massively, this is the key difference.