BoE’s working group backs SONIA as alternative to scandal-plagued LIBOR

Maria Nikolova

The working group’s recommendation will be subject to a broad market consultation scheduled for the middle of this year.

london

The Bank of England has earlier today announced that the Working Group on Sterling Risk-Free Reference, a group the Bank set up in 2015 to assist it in developing sterling RFRs, had picked the Sterling Overnight Index Average (SONIA) as its preferred near risk-free interest rate benchmark for use in sterling derivatives and relevant financial contracts.

The working group is market-led, comprising major sterling swap dealers, with its vote interpreted by the Bank of England as expression of market support for SONIA. The Bank will now seek to promote SONIA’s use as an alternative to sterling LIBOR, which has been hit 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: “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.”

“I am very grateful for the efforts of the Working Group in taking the first step on the path towards the adoption of a sterling risk-free rate as an alternative to Libor”, he added.

The announcement by the Bank of England follows media reports about its alleged involvement in LIBOR rigging. According to a recording obtained by BBC, the Bank and the UK government applied pressure on UK banks to push Libor rates lower. In the recording, senior Barclays manager Mark Dearlove tells Libor submitter Peter Johnson:

“The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”

Following the publication of the recording, there have been calls to further investigate the Libor scandal. On April 16, 2017, John McDonnell MP, Labour’s Shadow Chancellor, wrote to the Chancellor, Philip Hammond MP, to urge the opening of a public inquiry into the scandal of Libor interest-rate rigging.

John McDonnell noted that the rigging of Libor had been known to regulators and Bank of England staff at least as far back as August 2005. He stressed that as small businesses and public bodies are dependent on loans and more complex financial products linked to the value of Libor, the manipulation of the interest rate could have cost the public billions.

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