What Is The SONIA Rate?

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

The Sterling Overnight Interbank Average (SONIA) rate stands as a vital interest rate benchmark within the UK. Reflecting the overnight interest rate for unsecured transactions in the sterling market, the Bank of England (BoE) administers this rate, which finances trades taking place overnight in non-business hours. It offers a glimpse into the volume of overnight activities in the financial realm.

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MAIN POINTS

• SONIA represents the short-term, unsecured loan rates exchanged between financial entities in the UK.
• Introduced in 1997, its prominence grew after revisions in 2017 and 2018, making it the top risk-free benchmark rate for UK securities traders.
• This rise came in light of criticisms targeted at the LIBOR rate and its questionable calculation methods.
• To access SONIA curves, BlueGamma covers all your data requirements

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Diving Deeper into SONIA

Managed by the BoE, the Sterling Overnight Interbank Average Rate exemplifies the mean interest rate banks rely on when borrowing sterling from other banks or major institutional investors.

Every business day in London, the SONIA rate is determined based on the average rate of unsecured overnight sterling transactions brokered by members of the Wholesale Markets Brokers’ Association. As of June 15, 2023, the SONIA rate stood at 4.42840%.

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Criteria for SONIA transactions include:

• Reporting to the BoE's Sterling Money Market daily.
• Being unsecured with a one-day maturity.
• Occurring between 12 a.m. and 6 p.m.
• Having a minimum deal size of £25 million.

SONIA offers a clear indication of interest due at the period's end and has driven the inception of the Overnight Index Swap (OIS) market in the UK. Serving as a benchmark for many financial dealings, it is notably the reference for the sterling OIS market. The BoE notes that approximately £30 trillion of assets rely on this rate annually.

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How SONIA is Determined

The process includes:

• Data collection from financial institutions by 7 a.m.
• Ensuring data correctness and format.
• Rate and relevant statistics calculation.
• BoE rate publication.

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SONIA's Historical Journey

The WMBA founded SONIA in 1997. The UK's Financial Conduct Authority oversaw the WMBA's rate calculation and dissemination. Before SONIA, no sterling overnight funding rate existed, leading to fluctuating overnight rates in the UK. However, SONIA’s introduction brought consistency.

Managed by the BoE since April 2016, adjustments to the SONIA computation method were made in April 2018. August 2020 saw the launch of the daily SONIA Compounded Index.

In April 2017, the Working Group on Sterling Risk-Free Reference Rates preferred SONIA as their near-risk-free benchmark, affecting sterling financial products. This also presented an alternative to the dominant LIBOR, with the FCA stating its intention to cease LIBOR submissions post-2021. Contracts under LIBOR are set to conclude by June 30, 2023, with its replacement being the Secured Overnight Financing Rate (SOFR).

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Alterations to SONIA

As of April 2018, the BoE incorporated the following:

• Broader inclusion of overnight unsecured deals.
• A volume-weighted trimmed mean for rate computation.
• Rate publication delay till 9 a.m. the next business day for increased activity accounting.

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SONIA Explained

The Sterling Overnight Interbank Average rate, maintained and disseminated by the BoE, showcases the overnight rate for unsecured sterling market dealings. There are specific requirements for transactions, such as a minimum value of £25 million and execution between 12 a.m. and 6 p.m.

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Recent SONIA Rate?

On June 15, 2023, the rate was 4.42840%.

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SONIA's Supervision

The BoE supervises the Sterling Overnight Interbank Average rate, having assumed control in 2016 and revised its methodology in 2018. Initiated by the WMBA in 1997, the UK faced considerable overnight rate volatility before its inception. SONIA introduced more consistency and is now pivotal for various unsecured financial activities.

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In Conclusion

The BoE oversees the SONIA rate, employed by banks for unsecured transactions in the overnight sterling segment. It infuses a level of predictability into the nation's overnight market, indicating the breadth of overnight financial activities in the UK.

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