What is SONIA Interest Rate Benchmark?

The way we run SONIA complies with international best practice for financial benchmarks. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. At 9am, the SONIA rate is sent to the BoE’s licensees and users can then access the data from Bloomberg or Reuters. The benchmark is commonly used by traders and investors to get an idea of which direction interest rates are going. There is some industry discussion about the possibility of creating a forward-looking “term SONIA” rate. However, the potential scope of where such a rate may be preferable, the methodology for its creation, and the timing of its introduction, all remain uncertain.

What is the Sterling Overnight Index Average (SONIA)?

The interest rate in the overnight markets serves important functions such as shaping the monetary policy, as well as a key short-term indicator for traders. The position is reinforced by the lack of activity that questions LIBOR’s robustness as a benchmark rate. Secured interbank borrowing, which is the basis of LIBOR among financial institutions, has also declined considerably. The trend has also been reinforced by the post-crisis liquidity status, which labels interbank borrowing as unstable.

The other Bank members of the Oversight Committee are the Deputy Governor for Markets and Banking, as the Senior Manager responsible for SONIA, and two Executive Directors from other areas of the Bank. In order to provide additional challenge to the Bank on its governance and processes related to the administration of SONIA, and to bring an independent perspective, two external members are also on the Oversight Committee. Given that the Oversight Committee’s responsibilities require it to review highly commercially sensitive information, the selection of these external members has due regard for the necessity to avoid conflicts of interest. Section 4 outlines how the Bank satisfies itself of the quality of data inputs to the SONIA benchmark to allow timely publication. However, the superforex: a reliable broker Bank recognises that errors may occur in limited circumstances.

The benefits of spread betting

Sterling Overnight Interbank Average Rate is already used as the benchmark for discounting sterling rates and Sterling Overnight Indexed Swaps (OIS). The Bank of England’s series of changes has strengthened SONIA as a critical benchmark for financial contracts on sterling markets. Unlike in LIBOR, where the actual values are based on a market for brokered transactions whose transaction volume is limited, SONIA is anchored on actual transactions.

Data quality

Next, the BoE runs the data through its algorithm to ensure that there are no unusual patterns interfering with the quality of the data. Once this is done, the SONIA rate is calculated by taking a weighted average of all unsecured overnight sterling transactions of a minimum size of £25 million. The top 25% and bottom 25% are removed, and the mean of the central 50% is presented and rounded to four decimal places. Furthermore, it measures overnight interest rates in a way that is considered free from systematic risks.

This led to much stricter rules and regulations being put in place that made sure all interest rate benchmarks were based on data. It also meant that the countries previously involved in LIBOR created their own replacement indices – such as SOFR for the US and ESTR for the EU. Find out how the BoE’s base rate impacts the UK economy and financial markets. The SONIA rate was established in 1997 but wasn’t administered by the Bank of England (BoE) until 2016.

Can I calculate a compounded rate for SONIA?

• Senior Managers at every reporting institution attest annually to this authorisation having been made, and at the time writing, there were no exemptions to this attestation.
• Next, the BoE runs the data through its algorithm to ensure that there are no unusual patterns interfering with the quality of the data.
• The advice from the FCA is that firms should not wait for, or rely on, the development of any potential term SONIA rate.
• You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
• Firms who access the data on a timely basis via those redistributors and are using the data for their own internal business purposes do not need a direct licence with the Bank.

It is now used as a broad benchmark for different types of unsecured financial transactions. SONIA provided traders and financial institutions with an alternative to the LIBOR as a benchmark for short-term financial transactions. It also provided an alternative interest rate to the dominant London Interbank Offered Rate (LIBOR). To that end, the FCA announced it would no longer require banks to submit LIBOR quotes after 2021. SONIA is an overnight rate, based on actual market rates and reset on a daily basis in arrears; this removes any expectation of future events inherent in a forward-looking term rate. The Bank has robust and resilient systems and processes for the calculation of SONIA, with appropriate contingency procedures in place, including for the receipt of data from reporting institutions.

Administered by the Bank of England (BoE), SONIA is used to fund trades that occur overnight during off-hours. In line with the reformed methodology, the Bank of England estimates that the new benchmark accounts for about computer vision libraries GBP50 billion worth of financial transactions per day. SONIA “provides up-front certainty of the amount of interest due at the end of the interest period.” The rate also encouraged the formulation of the Overnight Index Swap (OIS) market, and the Sterling Money Markets in Great Britain. SONIA is a widely used benchmark for many financial transactions, among which is the reference rate for the sterling OIS market. SONIA (Sterling Over Night Indexed Average) is an overnight rate, set in arrears and based on actual transactions in overnight indexed swaps for unsecured transactions in the Sterling market. SONIA, the Sterling Overnight Index Average, is a vital interest rate benchmark in the UK financial markets.

What is SONIA?

Our online ‘calculator’ shows you what the annualised compounded interest rate is for any defined period since the Bank of England started publishing the Ewo indicator SONIA interest rate benchmark. SONIA is expected to replace GBP LIBOR across global financial markets by the end of 2021. The SONIA Oversight Committee reviews and provides challenge on all aspects of the benchmark determination process and provides scrutiny of the administration of SONIA. SONIA will be republished on a given day if the new rate is two or more basis points away from the earlier published rate. The SONIA Compounded Index will only be republished if either SONIA is republished or an error is identified in the calculation of the SONIA Compounded Index.

The Bank will only republish SONIA and/or the SONIA Compounded Index once for a given day. The statement of the underlying interest is intended to be an enduring statement of the economic concept that SONIA seeks to measure. The statement of the methodology describes how the specified underlying interest is currently to be measured.