The Bank of England (BoE) has announced that its Working Group on Sterling Risk-Free Reference Rates (the working group), a group of major dealers active in sterling rate swap markets, has decided on SONIA as its preferred near risk-free interest rate benchmark (RFR) for use in sterling derivatives and relevant financial contracts. This expression of market support for SONIA will act as a platform for further work to broaden and promote its use as an alternative to sterling LIBOR, contributing to an improvement in the resilience of the financial system.
Following its meeting on 7 April 2017, each member firm of the working group voted on its preferred RFR, choosing between three candidates: SONIA, £SONET, and £RIR. All three candidates are based on robust transaction volumes and measure overnight interest rates that are considered close to risk-free. The selection of SONIA as the sterling RFR reflects that, on completion of the SONIA reform process currently underway, it will be a strong and credible benchmark that meets the criteria set out by the working group. The working group’s recommendation will be subject to a broad market consultation to be held in the middle of 2017.
Chris Salmon, BoE’s Executive Director for Markets, said: “This is an important milestone in the benchmark reform process outlined by the FSB. Work must now begin on planning for the widespread adoption of SONIA, in consultation with a broader set of market participants. This will lead to more effective interest rate hedging markets for end-users, while minimising opportunities for misconduct.”