28 April 2017

Bank of England: SONIA recommended as the sterling near risk-free interest rate benchmark

The Working Group on Sterling Risk-Free Reference Rates – a group of major dealers active in sterling interest rate swap markets – has announced 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.

This announcement marks a key step in the interest rate benchmark reform agenda laid out by the Financial Stability Board (FSB) in 2014. Following cases of attempted manipulation and false reporting of global reference rates, the FSB recommended – alongside the reform of existing benchmarks including LIBOR – the development and adoption of alternative near risk-free benchmarks.

In the UK the Working Group on Sterling Risk Free Reference Rates was set up by the Bank of England in 2015 to take this work forward. The group is market-led, comprising major sterling swap dealers, reflecting the need for an RFR with broad market support. ISDA and LCH Ltd participate as observers to provide relevant technical advice. The Bank and the Financial Conduct Authority participate as non-voting members.

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 working group’s votes have now been collated and the outcome published as part of the minutes of the group’s 7 April meeting. The decision in favour of SONIA was by more than the required two-thirds supermajority.

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.

Press release

© Bank of England