Sterling Overnight Interbank Average Rate (SONIA)

What Is the Sterling Overnight Interbank Average Rate (SONIA)?

The Sterling Overnight Index Average, abbreviated SONIA, is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market. It is utilized for overnight funding for trades that happen in off-hours and addresses the depth of overnight business in the marketplace.

The Sterling Overnight Interbank Average Rate furnishes traders and financial institutions with an alternative to the London Interbank Offered Rate, or LIBOR, as a benchmark interest rate for short-term financial transactions.

Understanding the Sterling Overnight Interbank Average Rate

The Sterling Overnight Interbank Average Rate (SONIA) was laid out in 1997 by the Wholesale Markets Brokers' Association (WMBA) in Great Britain. Before the SONIA, the WMBA had no sterling overnight funding rate, which made volatility in the United Kingdom's overnight interest rates. With the creation of the SONIA came stability to overnight rates.

Calculated every business day in London, the SONIA fixing is the weighted average rate of unsecured overnight sterling transactions brokered by WMBA individuals. The base deal size for inclusion is 25 million British pounds.

The rate likewise supported the detailing of the Overnight Index Swap (OIS) market, and the Sterling Money Markets in Great Britain. SONIA is a widely involved benchmark for some transactions, among which is the reference rate for the sterling Overnight Indexed Swap market.

Recent Changes to SONIA

The Bank of England (BoE) fills in as the administrator for the SONIA benchmark. The Financial Conduct Authority (FCA) manages the Wholesale Markets Brokers' Association as a calculation and publication agent. In any case, in April 2018, the BoE itself took over calculation and publication duties. Furthermore, the Bank of England reported several changes that became substantial as of April 2018:

1. SONIA was expanded to incorporate overnight unsecured transactions which will be negotiated reciprocally as well as those organized through brokers. They currently collect data utilizing their Sterling Money Market data collection system.
2. The bank utilizes a volume-weighted trimmed mean method for computing the rate.
3. The SONIA rate shows up on the business after a long time after the day the rate relates at 9 a.m. This deferred publication permits the bank to account for a higher volume of activity.

In April 2017, the Working Group on Sterling Risk-Free Reference Rates, which is a group of active, powerful dealers in the sterling interest rate swap market, announced SONIA would be it's preferred, close to risk-free interest rate benchmark. This change will impact sterling derivatives and related financial contracts, and give an alternative interest rate to the predominant London Interbank Offered Rate (LIBOR).

With that in mind, the U.K's. Financial Conduct Authority announced it would never again expect banks to submit LIBOR quotes after the year 2021. While LIBOR will keep on existing from that point forward, its practicality as a reference rate will probably be reduced.

As per a declaration by the Federal Reserve in November 2020, banks ought to stop composing contracts utilizing LIBOR toward the finish of 2021. The Intercontinental Exchange, the authority responsible for LIBOR, will stop distributing multi week and multi month LIBOR after December 31, 2021. All contracts utilizing LIBOR must be wrapped up by June 30, 2023.

Features

• Sent off in 1997, several changes made in 2017 and 2018 have driven the SONIA rate to be the preferred risk-free benchmark interest rate by U.K. securities dealers.
• The Sterling Overnight Index Average, or SONIA, is an index of extremely short-term unsecured loans among and between U.K. financial institutions.
• This comes as the LIBOR rate, and its methodology for calculation, has gone under analysis for fixing and fraud.