SONIA Compounded Index, what's in a number?

June 11 2020

Phil LloydHead of Market Structure & Regulatory Customer Engagement

View bio

Other insights

View more insights

2 minute read

On 11 June, the Bank of England published its response to the feedback received on its discussion paper on a SONIA1 index and period averages. Is this the number many have been asking for or are we hearing too much background noise around conventions to allow easy transition?

The publication of a daily SONIA compounded index was supported by almost all of the respondents and will be therefore taken forward by the BoE2. The BoE plans to publish it in early August, with a precise date to be confirmed later.

This aims to provide a standardised way of calculating compounded rates which has been seen as a barrier to transition, particularly for the less sophisticated end of the market.

Some respondents proposed that the BoE calculates other indices or data points with negative rate being an example. 

There was no consensus on the publication of SONIA period averages and the conventions that would underpin such rates. They will therefore not be published.  

Does this solve the problem and can the market help? 

The BoE acknowledged the need for other indices but flagged that further work would need to be conducted to establish a market consensus on additional conventions  as we've written about before. The BoE therefore does not propose to produce additional indices at this stage, but has not rejected doing so in the future.  

The continued discussion around conventions does mean the market is asking for functionality that can cater for Shift, Lag and other variables. The NatWest Markets RealisedRate.com is well used and continues to be a tool for the wider market to help transition away from LIBOR3to the main backward looking rates. 

1. SONIA - Sterling Overnight Index Average
2. BoE - Bank of England
3. LIBOR - London Interbank Offered Rate

LIBOR
SONIA


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2020 © NatWest Markets Plc. All rights reserved.

Related insights

SONIASONIA & SOFR - compounding the problem with conventional wisdom?

There’s been a lot of talk recently in the Risk Free Rates (RFR) space about conventions to use for compounding calculations, and what the "right" number is.

RegulationThe news of my death has been greatly exaggerated…LIBOR ending before 2021?

"LIBOR death notice could be served this year - FCA". Did you see the article and did it leave you confused?

Market infrastructure & regulationLIBOR on the ropes but when is the knockout blow?

With all the talk on fallbacks, pre-cessation triggers and term rates you might think we were approaching the end game for London Interbank Offered Rate (LIBOR). But is the industry clear how LIBOR will be dealt its knockout blow, or how it will stagger on?