It was calculated by asking 35 banks around the world to answer a survey on the rates at which they would offer each other short-term loans. The average number of the central 50% of these answers was given as the LIBOR daily figure. The Sterling Overnight Interbank Average rate (SONIA) is the effective overnight interest rate paid by banks for unsecured transactions in British sterling – these are loans that are not backed by collateral. It is the overnight funding charge for trades that occur in off-market hours and represents the amount of overnight business in the marketplace. The Bank has robust and resilient systems and processes for the calculation of SONIA, with appropriate contingency procedures in place, including for the receipt of data from reporting institutions. Nevertheless, as an ultimate backstop in the event of disruption to the normal production of SONIA, a rate would be published, calculated using a contingency methodology.
- Before SONIA, the UK used LIBOR as a benchmark for daily interest rates on loans and financial contracts.
- It took control of SONIA in 2016 and made changes to its methodology two years later.
- There is some industry discussion about the possibility of creating a forward-looking “term SONIA” rate.
- The level of Bank Rate plus the mean of the spread of SONIA to Bank Rate over the previous five publication days, excluding the days with the highest and lowest spread to Bank Rate.
The Bank of England is responsible for publishing the SONIA rate, which is the interest rate benchmark used by banks for different unsecured financial transactions in the overnight sterling market. It provides some degree of stability to the country’s overnight market and represents the depth of overnight business in the country’s financial markets. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider.
1 The SONIA Oversight Committee
The SONIA Compounded Index will only be republished if either SONIA is republished or an error is identified in the calculation of the SONIA Compounded Index. Senior Managers, under the Senior Managers Regime, at each reporting institution annually attest to their institution’s adherence to the Reporting Instructions. This process serves to ensure that appropriate governance arrangements are in place at each reporting institution in relation to their Form SMMD data. The transition from LIBOR to SONIA was a huge undertaking, as the previous system covered sterling deals to a notional value of $30 trillion.
The Bank of England manages and operates the Sterling Overnight Interbank Average rate. It took control of SONIA in 2016 and made changes to its methodology two years later. As such, there was a greater degree of volatility in the overnight interest rate environment in the United Kingdom. It is now used as a broad benchmark for different types of unsecured financial transactions.
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However, the potential scope of where such a rate may be preferable, the methodology for its creation, and the timing of its introduction, all remain uncertain. The advice from the FCA is that firms should not wait for, or rely on, the development of any potential term SONIA rate. SONIA is expected to replace GBP LIBOR across global financial markets by the end of 2021. The Bank has established a whistleblowing mechanism in order to facilitate early awareness of potential misconduct or irregularities that may arise in relation to SONIA. Detailed information regarding both the mechanism and legal protection of whistleblowers is available on the SONIA interest rate benchmark page.
If an observation shift is not being used, the daily SONIA rates are taken from the observation period but weighted according to when the days upon which they are used fall in the interest period. In April 2017, the Working Group on Sterling Risk-Free Reference Rates, which is a group of active, influential dealers in the sterling interest rate swap market, announced SONIA would be its preferred, near-risk-free interest rate benchmark. This change impacted sterling derivatives and related financial contracts. It also provided an alternative interest rate to the dominant London Interbank Offered Rate (LIBOR). To that end, the FCA announced it would no longer require banks to submit LIBOR quotes after 2021. We have seen some funders choosing to use a cumulative compounded rate rather than a non-cumulative compounded rate.
In order to provide additional challenge to the Bank on its governance and processes related to the administration of SONIA, and to bring an independent perspective, two external members are also on the Oversight Committee. Given that the Oversight Committee’s responsibilities require it to review highly commercially sensitive information, the selection of these external members has due regard for the necessity to avoid conflicts of interest. The purpose of this document is to provide existing and potential users of the SONIA benchmark with relevant information regarding the benchmark determination, publication and governance. Essentially, the daily SONIA rates for each day in the interest period need to be added up to give a rate for the period. The UK market has adopted the approach of compounding those daily SONIA rates in arrears rather than taking a simple average.
Similarly, some funders may opt to use an observation shift (in particular, this approach may be relevant when hedging a loan as an observation shift is recommended for use with derivatives). This means that the daily SONIA rate for any particular https://www.fx770.net/ day will actually be the daily SONIA rate as at the day falling 5 business days before that particular day. This allows SONIA rate for the interest period to be caculated 5 business days prior to the end of that interest period.
Because a daily SONIA rate is only known on the following business day, the SONIA rate for a particular interest period would only be known the day after the end of an interest period. This methodology is only intended to be used for relatively short-term contingency events. If such an event was expected to be prolonged, the Bank would consider the appropriate response at the time, with reference to the review and evolution process outlined in Section 8. The level of Bank Rate plus the mean of the spread of SONIA to Bank Rate over the previous five publication days, excluding the days with the highest and lowest spread to Bank Rate. For these purposes the relevant level of Bank Rate is that at the close of the SONIA transaction window.
How popular is Sonia?
The SONIA Oversight Committee reviews and provides challenge on all aspects of the benchmark determination process and provides scrutiny of the administration of SONIA. As the sole input to the SONIA Compounded Index is the published SONIA rate, the SONIA Compounded Index does not require a contingency calculation methodology. Another concern raised about SONIA, or rather the transition away from LIBOR, is that the group of five currencies will not be fully aligned. However, the benchmarks will have to conform to international regulations which will go someway to creating global unity between the rates. That means we take responsibility for its governance and publication every London business day. SONIA is backward-looking daily rate unlike LIBOR which is forward-looking and set for different tenors that already align to typical interest periods.
Firms who access the data on a timely basis via those redistributors and are using the data for their own internal business purposes do not need a direct licence with the Bank. Alternatively should those users wish to, they can receive SONIA on a timely basis under a direct licence from the Bank for a fee. The trimmed mean is calculated as the volume-weighted mean rate, based on the central 50% of the volume-weighted distribution of rates. (i) Statement of underlying interestSONIA is a measure of the rate at which interest is paid on sterling short-term wholesale funds in circumstances where credit, liquidity and other risks are minimal. As part of the Bank’s commitment to meeting international best practice in its administration of SONIA, it has published a statement of its compliance with the IOSCO principles for Financial Benchmarks.
1 Daily publication arrangements
The statement of the underlying interest is intended to be an enduring statement of the economic concept that SONIA seeks to measure. The statement of the methodology describes how the specified underlying interest is currently to be measured. Please review the copyright information in the series notes before sharing. At 9am, the SONIA rate is sent to the BoE’s licensees and users can then access the data from Bloomberg or Reuters. The benchmark is commonly used by traders and investors to get an idea of which direction interest rates are going. SONIA (Sterling Overnight Index Average) is an important interest rate benchmark.
The Bank also takes account of representations from users of SONIA, the Oversight Committee and the Stakeholder Advisory Group as to the possible need for changes in the methodology. An important part of the Bank’s governance arrangements for administering SONIA is an oversight function to provide challenge to the administration of SONIA. This comprises the SONIA Oversight Committee, supported by the SONIA Stakeholder Advisory Group. Once the republication deadline for SONIA has passed, no amendments will be made to the benchmark rate or the SONIA Compounded Index under any circumstances.
Pros and cons of SONIA
SONIA (Sterling Over Night Indexed Average) is an overnight rate, set in arrears and based on actual transactions in overnight indexed swaps for unsecured transactions in the Sterling market. Unlike LIBOR, the SONIA benchmark is calculated using actual transactions, rather than survey results. This means that it not only reflects the average rate of transactions, but that there is less risk of the rate being manipulated. If an observation shift is being used daily SONIA rates are weighted according to when the days from which they are taken fall in the observation period.
It represents the average interest rate banks use when they borrow British currency from others, including financial institutions and large institutional investors. The calculation will only be made 5 business days before the end of the interest period. The Oversight Committee is chaired by the Bank’s Chief Operating Officer, who does not have line responsibility for the production of the benchmark. The other Bank members of the Oversight Committee are the Deputy Governor for Markets and Banking, as the Senior Manager responsible for SONIA, and two Executive Directors from other areas of the Bank.
In order to support the transparency of the benchmark determination process, the Bank periodically publishes summary information on errors that did not meet the republication criteria. Errors whose absolute impact was less than 0.001 percentage points is excluded from this analysis. (ii) Statement of methodologyOn each London business day, SONIA is measured as the trimmed mean, rounded to four decimal places, of interest rates paid on eligible sterling denominated deposit transactions. Before SONIA, the UK used LIBOR as a benchmark for daily interest rates on loans and financial contracts.
