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Lag mechanism meaning
Published by a LexisNexis Banking & Finance expert
What does Lag mechanism mean?
A lag mechanism is a market convention used in sterling bond and loan documentation to calculate compounded sonia in arrears while giving parties advance visibility of interest cashflows. It applies an “observation lag” (also called a lookback without observation shift): the daily SONIA rates are observed and compounded over a reference period that begins a set number of business days before the start of the interest period and ends the same number of days before its end. The lag is typically five London business days, but the number of days is contractual and should be specified.
This is not defined by legislation or case law; it is a descriptive term reflecting market practice developed during the LIBOR transition and informed by guidance from the Sterling RFR Working Group. It is implemented through express drafting in bond terms and conditions or loan facility agreements and related calculation provisions.
Key purpose and effect: it allows the interest amount to be determined and notified shortly before the payment date, aiding operational certainty for borrowers, issuers, lenders and agents. Usage and meaning are broadly consistent across England & Wales, Scotland, Northern Ireland and Ireland for sterling (SONIA) transactions, though individual deal conventions may vary.
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PRACTICE NOTES
UK Banking, Finance, Capital Markets, Derivatives and Insolvency Law Glossary including Islamic finance
Banking & Finance glossary A Auditing and Accounting Organisation for Islamic Financial Institutions (AAOIFI) The foremost Islamic, international, autonomous, independent, not-for-profit corporate body that develops and issues accounting, auditing, governance, ethics and Shari’ah benchmarks and standards for Islamic Financial Institutions (IFIs) and the wider Islamic finance sector. Founded in Bahrain in 1991, it is backed by a number of institutional members across more than 45 countries, including central banks and regulatory authorities, financial institutions, accounting and auditing practices, and legal firms. Its pronouncements are currently applied by leading Islamic financial institutions across the world and have advanced a progressive and gradual harmonisation of global Islamic finance practice. It also delivers professional qualification programmes—notably Certified Islamic Professional Accountant (CIPA), Certified Shari’ah Adviser and Auditor (CSAA), and the corporate compliance programme—in efforts to strengthen the industry’s human capital and governance frameworks. For further details, see Practice Note: Key participants in the Islamic finance industry—Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Acceleration Acceleration is the formal action...
22 May
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