PRIMER: Sonia – what next? (part 2)

Author: Amélie Labbé | Published: 7 Dec 2018

In part 1 of this primer, IFLR considered what the Sterling overnight index average was and why it was being re-developed to take the place held by its long-standing counterpart, the London interbank offered rate (Libor).

The second instalment of this primer takes a more in-depth look at how a new Sonia+ rate is emerging and how it could work in practice.

What is Sonia+?

Work is currently ongoing to turn Sonia into a term rate and make it more forward-looking like Libor – the so-called Sonia+ rate. Setting aside the discussion as to whether a term rate is needed for all products – swaps, for instance, can rely on overnight rates – how a next-generation Sonia rate will function is key. One challenge is that, for now, Sonia has less history and liquidity, and a smaller track record than Libor.

"Before a bank can offer a Sonia-backed product, it needs to understand...