BoE published a discussion paper on the risk-free rate transition through the provision of compounded Sterling Overnight Index Average or SONIA. To support and accelerate the widespread adoption of SONIA as a reference rate for products such as loans, BoE intends to provide simple means for users to work out the compound interest due on products without performing calculations using the underlying SONIA rate of each day. Responses to the questions posed in the discussion paper are invited by April 09, 2020. BoE also published a speech by Andrew Hauser, the Executive Director for Markets, on the BoE initiatives aimed at further supporting risk-free rate transition.
BoE and FCA are working closely with market participants to support use of SONIA as the predominant interest rate benchmark in sterling financial markets as markets transition away from LIBOR. To accelerate the adoption of SONIA as a reference rate in sterling markets, BoE is seeking views from sterling market participants on the:
- Intention of BoE to publish a daily SONIA Compounded Index to support the use of SONIA in a wide range of financial products by simplifying the calculation of compounded interest rates. SONIA Compounded Index, which is a number representing the returns from a rolling investment earning interest each day at the SONIA rate. The change in this index between any two dates could be used to calculate the interest rate payable on a SONIA product over that period. Subject to feedback, publication of the SONIA Compounded Index is anticipated to commence by the end of July 2020, with a more precise date to be communicated in the second quarter of 2020.
- Usefulness of BoE publishing a simple set of compounded SONIA Period Averages, which would give users easy access to SONIA interest rates compounded over a range of set time periods. As the set periods used to generate such averages cannot always align with those currently applied in products referencing SONIA, BoE is seeking to establish whether there is market consensus on how to define the relevant time periods. BoE is inviting comments on the options presented in this paper, after which it will decide whether publishing such averages would be helpful.
Keywords: Europe, UK, Banking, Insurance, Securities, SONIA, LIBOR, Interest Rate Benchmarks, Reference Rates, Risk-free Rates, BoE
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