SONIA Compounded Index, what's in a number?

11 June 2020

Phil LloydHead of Market Structure & Regulatory Customer Engagement

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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 They will therefore not be published.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


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