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

Sterling Overnight Index Average, abbreviated SONIA, is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market. It is used for overnight funding for trades that occur in off-hours and represents the depth of overnight business in the marketplace.

The key takeaway for traders and financial institutions is that it offers an alternative to LIBOR as a benchmark interest rate for financial transactions.

Understanding SONIA

Calculated each business day in London, the SONIA fixing is the weighted average rate of unsecured overnight sterling transactions brokered by Wholesale Markets Brokers' Association (WMBA) members. The minimum deal size for inclusion is 25 million British pounds.

The Sterling Overnight Interbank Average Rate (SONIA) was established in 1997 by the Wholesale Markets Brokers' Association in Great Britain. Before the SONIA, the WMBA had no sterling overnight funding rate, which created volatility in the United Kingdom's overnight interest rates. With the creation of the SONIA came stability to overnight rates. 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 transactions, among which is the reference rate for the sterling Overnight Indexed Swap market.

Changes to SONIA

The Bank of England serves as the administrator for the SONIA benchmark. The Financial Conduct Authority (FCA) regulates the Wholesale Markets Brokers' Association as a calculation and publication agent. However, in April 2018, the Bank itself will take over calculation and publication duties. Also, the Bank of England reported several changes to become valid as of April 2018:

  1. SONIA will be expanded to include overnight unsecured transactions which will be negotiated bilaterally as well as those arranged via brokers. They will collect data using their Sterling Money Market data collection system.
  2. The bank will use a volume-weighted trimmed mean method for calculating the rate.
  3. The SONIA rate will appear on the business day after the day the rate relates to and be published at 9 am. This delayed publication will allow the bank to account for a higher volume of activity. 

In April 2017, the Working Group on Sterling Risk-Free Reference Rates, which is a group of active, influential dealers in the sterling interest rate swap market, announced SONIA would be it's preferred, near risk-free interest rate benchmark. This change will impact sterling derivatives and related financial contracts, and provide an alternative interest rate to the dominant London Interbank Offered Rate (LIBOR). 

To that end, the Financial Conduct Authority announced it would no longer require banks to submit LIBOR quotes after 2021. While LIBOR will likely exist after that, its viability as a reference rate will likely be curtailed.