Has the loan market "realised" SONIA's potential?

July 12 2019

Phil LloydHead of Market Structure & Regulatory Customer Engagement

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In March, we highlighted that whilst the derivative and bond markets had made great progress in embracing SONIA, the loan market was yet to take the leap with a "Realised Rate" product. We discussed the need for term rates and challenged the market to offer a daily compounded product in line with bond issuance.

The loan market has since delivered (as detailed by the Financial Times), the global transport company National Express and NatWest Bank Plc signed the first ever loan with interest based on realised SONIA. The interest uses a daily compounded rate with a five day reset lag in line with all SONIA bond issuance.

In March the Sterling Risk-Free Reference Rates Working Group issued a consultation paper on SONIA conventions which we are expecting to have imminent feedback on. In this loan facility borrowing is available for up to 180 days reflecting additional interest period flexibility, the conventions used are:

Calculation method	Daily compounding methodology (as also adopted in the Sterling FRN market)
Business day convention	London, modified following
Day count	Actual / 365 daily interest calculation applying compounding to SONIA component only
Rounding	Rounded to the fifth decimal place with 0.000005 rounded upwards
Lag	5 business days
Margin treatment	Excluded from compounding, no other adjustments made

This is a major step forward since Andrew Bailey’s speech in July 2017, NatWest and NatWest Markets have structured the first SONIA bond, the first amendment of a bond from LIBOR to SONIA and now the first ever SONIA loan, and continue to remain a market leader in SONIA derivatives.

Market infrastructure & regulation

SONIA

Rates

IBOR reform

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