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SONIA - A New Beginning towards Benchmark Buoyancy

In line with its strategy of reforming key interest rate benchmarks, the Bank of England (BoE) recently announced that it would be taking over as the administrator of Sterling Overnight Index Average (SONIA) from April 25, 2016. SONIA, which reflects the bank and building societies’ overnight funding rates in the sterling unsecured market, was administered by Wholesale Market Brokers’ Association (WMBA) until recently under the supervision of Financial Conduct Authority (FCA). The WMBA is now designated as the calculation agent of SONIA which will also continue to publish the rate in accordance with regulatory guidelines.

The Bank of England taking over as the administrator of SONIA is a crucial event in the key interest rate benchmark’s reform process, which was announced in July 2015. With over £4 trillion in notional value of outstanding sterling OIS contracts, the criticality of the benchmark in sterling markets and the limited volume of underpinning transactions triggered the Bank of England to reform SONIA and secure the benchmark’s longevity. As a tactical approach, the BoE proposed to expand the eligible transactions criteria to include brokered as well as bilaterally negotiated overnight unsecured deposit transactions. The ongoing money market data collection exercise undertaken by the BoE is a step in fulfilling this objective.

The taking over as the administrator of SONIA is a corollary to the strategic approach adopted by the BoE in the reform process resulting in two key advantages. One, the BoE will have the necessary statutory authority to enforce data submission from banks, building societies and major investment firms on their secured and unsecured money market borrowing activity. This will pave way for the enhanced benchmark methodology envisaged by the BoE to be implemented by Q2 2017. Two, with the impending implementation of EU benchmark regulation and its strong administrator regulatory norms, the BoE would be in a better position to provide oversight and governance of the benchmark to ensure compliance of local as well as international regulatory norms.

It is clear that the BoE intends to administer SONIA in line with the international best practices encapsulated by the IOSCO Principles for Financial Benchmarks. The BoE intends to conduct a public consultation for revising the computation methodology of SONIA in Q3 2016. In conjunction with the data collection exercise, this would ensure that the reformed benchmark would be on course for a Q2 2017 adoption.

At ACAPM, we believe this is a crucial point in the trend of increasing consolidation of regulatory supervision of market benchmarks. It is encouraging to see regulators across the globe making amends to restore the investor confidence at large. While this may result in increasing regulatory scrutiny for banks and financial institutions, the upside is a more resilient market and a fundamentally strong financial system.



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