Each month, our team reviews and discusses the current state of USD LIBOR and SOFR markets, exploring the performance of the indices as well as the borrowing and derivatives markets around them. USD LIBOR will transition to SOFR, likely by the end of 2021. The (EUR). While LIBOR is forward looking, giving the cost of borrowing for the future period starting on the day it is published, SONIA is backward looking. As SONIA does not include an implicit credit premium for the banking sector, it typically fixes lower than LIBOR.
This means that borrowers with debt linked to SONIA will not know the floating rate for each interest period until the end of the period. 99.94% of trades had a Fixed Leg conforming to the Act/365 Fixed day count convention. The exact date has not been fixed by the FCA — instead, the regulator will stop asking banks to participate in LIBOR’s calculation after 31 December 2021. Other products show a similar story. These terms fixings are intended to ease the uptake of SONIA and made the transition easier for end-user cash markets.
The official sector in the UK are pushing for a CLOB model since it is deemed easier for end-users to understand and compare to what is seen as quoted on MTFs/SEFs. GBP SONIA by notional, broken down by time to start date. Does this suggest that a successful term fixing will need to incorporate the information embedded in these forwards to be truly representative? We can hence look at the volumes traded in both GBP STIR contracts (ICE Sterling, a.ka. The paper outlines a “calculation engine” which might set some alarm bells ringing regards complexity/transparency.
Again, different. All rights reserved. Therefore as a first level of a waterfall approach indicative quotes could also be used: This approach is consistent with the first stages of both the LSEG and ICE approaches. Sonia’s existence has taken the UK past some of the early challenges facing the euro and US dollar markets, but others await: liquidity continues to be concentrated at the front end of the curve; live, streaming prices do not yet exist, hampering prospects for a term version of the benchmark; and there has been little adoption of Sonia in bond and loan markets. I can also see why high level talk of a “calculation engine” puts people off.
It is an interesting conundrum to solve. By extension, if there is no transaction data covering a future date, then the model must use some type of interpolation. This follows on from the 2018 consultation on term rates, which identified demand for term rates from certain cash markets (responses here, including our own).
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