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    BoE Responds to Feedback on SONIA Compounded Index and Period Averages

    June 11, 2020

    BoE published its response to the market feedback on the discussion paper on risk-free rate transition through the provision of compounded Sterling Overnight Index Average or SONIA. BoE also published the feedback received on the discussion paper. The discussion paper was released in February 2020 and sought views on the intention of BoE to publish a daily SONIA Compounded Index and on the usefulness of publishing a simple set of compounded SONIA “period averages.” BoE also released a spreadsheet on illustrative series of the SONIA Compounded Index data. The spreadsheet includes illustrative calculations, based on published SONIA data, which are intended only to show how the SONIA Compounded Index would work and should not be used for any other purpose.

    BoE received responses from 41 stakeholders, the large majority of whom were banks and other financial institutions. BoE has reviewed the feedback to the discussion paper and has set out its position:

    • There was near-unanimous support for intention of BoE to produce a SONIA Compounded Index. Respondents agreed that an index could help to provide a standardized way of calculating compounded rates, particularly for less sophisticated counterparts that may not have access to detailed financial data. There was also a high degree of support for the proposed methodology. BoE, therefore, confirms that it will produce the SONIA Compounded Index using the methodology described in the discussion paper. BoE anticipates that it will commence the publication of the SONIA Compounded Index in early August. The precise date will be confirmed in due course.
    • A number of respondents suggested additional indices or data that might be produced by BoE. These proposals have been reviewed carefully by BoE, which is also aware of ongoing discussions on how best to use risk-free rates in sterling and non-sterling loan markets. Any further work in this area would, however, require both a definitive market consensus on specific additional conventions and a clear cost-benefit case. Consistent with the design principles of simplicity and wide utility set out in the discussion paper, BoE is not minded to produce additional indices or data at this time.
    • On the question of BoE producing a set of “period averages,” a number of the respondents noted that they would not use the period averages in financial contracts. Additionally, a significant minority—including all trade bodies who responded (representing a range of banks, intermediaries, and small and large end-users)—said BoE should not produce such period averages. Given a lack of consensus on both the usefulness of SONIA period averages and the conventions underpinning such rates, in line with the position set out in the February discussion paper, BoE will not be producing The SONIA period averages at this time.


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    Keywords: Europe, UK, Banking, Insurance, Securities, SONIA, LIBOR, Interest Rate Benchmarks, Reference Rates, Risk-Free Rates, BoE

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