Bank of England to administer 'critical' SONIA interest rate benchmark

The Wholesale Markets Brokers' Association (WMBA), which is currently responsible for the rate, will continue to calculate and publish SONIA but will do so on behalf of the Bank of England from this date, according to the announcement. WMBA will continue to calculate and publish the benchmark in the same way as it does currently, although the Bank of England intends to expand the range of transactions underpinning the calculation in due course in order to strengthen the rate.

"The Bank views reform of SONIA as necessary, given its role as a critical benchmark in sterling markets, and in view of the limited size of the market for brokered deposits, on which SONIA is currently based," the central bank said in a statement. "The Bank plans to broaden the range of transactions underpinning SONIA to include bilaterally negotiated, as well as brokered, transactions in order to make it more resilient."

SONIA was introduced in 1997 and reflects bank and building societies' overnight funding rates in the sterling unsecured market. The outstanding value of sterling-denominated Overnight Indexed Swaps (OIS) using SONIA as a reference rate exceeded £4 trillion as of the end of March 2016, according to figures provided by the Bank of England.

The benchmark and WMBA as its current administrator, have been regulated by the Financial Conduct Authority (FCA) since April 2015, following an early recommendation of the Fair and Effective Markets Review (FEMR) that seven benchmarks - including SONIA - should become FCA regulated. To do so, FCA built on the rules it introduced to govern the London Interbank Offered Rate (LIBOR) benchmark in 2013.

The Bank of England intends to administer the rate in line with international best practice, as set out in the IOSCO Principles for Financial Benchmarks, according to the announcement. The principles were finalised in July 2013 by IOSCO, an international task force which sets standards for the regulation of securities markets around the world. The Bank of England also plans to appoint a SONIA Advisory Committee made up of external members to support it in its administration of the benchmark, it said.

Changes to the methodology for calculating SONIA, including the use of a broader range of transactions to underpin the rate, are expected to be introduced in the second quarter of 2017, according to the announcement.