BoE confirms reforms to SONIA, preferred alternative sterling LIBOR, to be implemented in April 2018

Maria Nikolova

The Bank of England will be taking on the end-to-end administration, including the calculation and publication of SONIA, effective April 23, 2018.

In tune with earlier announced plans to promote the Sterling Overnight Index Average (SONIA) as as its preferred near risk-free interest rate benchmark for use in sterling derivatives and relevant financial contracts, the Bank of England confirmed today that its reforms to SONIA will become effective on April 23, 2018.

As a result of the reforms the Bank will be taking on the end-to-end administration, including the calculation and publication of SONIA. Also, the coverage of SONIA will be broadened to include overnight unsecured transactions negotiated bilaterally as well as those arranged via brokers, using the Bank’s Sterling Money Market Data Collection as the data source. In addition, the averaging methodology for calculating SONIA will be changed to a volume-weighted trimmed mean, and the publication of SONIA will move to 09:00 on the business day following that to which the rate pertains.

Friday – April 20, 2018 will be the final day for which SONIA will be calculated and published by the WMBA using the current methodology. For the rate pertaining to Monday 23 April, SONIA will be calculated by the Bank using the reformed methodology and published at 9am on Tuesday 24 April.

Over the last six months, the Bank said, estimates show that reformed SONIA continues to be around 1.3 basis points below current SONIA, calculated on average daily volumes of around £46 billion, over three times larger than those underlying current SONIA.

Earlier this year, the Bank said it would promote SONIA’s use as an alternative to sterling LIBOR, which has been plagued by a multitude of scandals over the past few years. In the UK, the Financial Conduct Authority is overseeing the reform of Libor (including sterling Libor), whereas the Bank of England is overseeing the development of sterling RFRs.

Chris Salmon, Bank of England Executive Director for Markets, said back then: “Work must now begin on planning for the widespread adoption of SONIA, in consultation with a broader set of market participants. This will lead to more effective interest rate hedging markets for end-users, while minimising opportunities for misconduct.”

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