Following the expected cessation of GBP LIBOR at the end of 2021, the preferred alternative among many market participants is SONIA (Sterling Overnight Index Average). How can the Refinitiv Term SONIA benchmark help in this transition by providing a forward-looking term structure?
- The cessation of GBP LIBOR is expected at the end of the year. This means that market participants must source alternative rates.
- The preferred alternative rate for many financial instruments and contracts will be SONIA. However in some markets, the overnight risk-free nature of this benchmark makes it poorly aligned with users’ operational requirements.
- A reference rate with a forward-looking term structure, such as Refinitiv Term SONIA, may be required for many participants of the loan, trade and working capital, export finance/emerging markets and Islamic finance markets.
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With the cessation of GBP LIBOR expected at the end of the year, market participants must source alternative rates.
For many financial instruments and contracts, SONIA (Sterling Overnight Index Average) will be the preferred alternative rate, but in some markets the overnight risk-free nature of this benchmark makes it poorly aligned with users’ operational requirements.
Many participants of the loan, trade and working capital, export finance/emerging markets and Islamic finance markets may require a reference rate with a forward-looking term structure.
The Refinitiv Term SONIA has leveraged its extensive experience in administering benchmarks to create a GBP forward-looking term risk-free rate that will be published at 11:50am (London time) on a daily basis. It’s available in one-month, three-month, six-month and twelve-month tenors.
1. Refinitiv Term SONIA has been extensively tested by the market
The Refinitiv Term SONIA was first published in prototype format in July 2020.
Since then, it’s been accessed over 20,000 times via our Eikon terminal and a further 200 users have accessed it via our website.
During this prototype phase, users weren’t permitted to immediately adopt it as a reference rate in financial instruments and contracts, but it provided an excellent opportunity for them to test the rate and understand its behavior.
For example, users were able to explore how the lack of credit risk impacted its performance when comparing it with LIBOR, and many users also took this opportunity to work through how they could upgrade their systems to deal with the new data.
This extensive testing and market engagement, including through our consultation, have been critical in allowing Refinitiv to deliver a rate that is aligned with industry requirements. It highlighted both our strengths, as well as opportunities to refine the rate.
Limited enhancements have been made to ensure the fundamental behavior of our rate remains unchanged over the prototype period so users have a consistent time-series dataset.
2. Robust and accurate
The accuracy and robustness of the Term SONIA benchmark are of paramount importance. In order to achieve this, Refinitiv has focused on sourcing data that is both accurate and persistent.
The primary input source is spot-starting centrally cleared OIS from major inter-dealer broker markets. While this accurately captures the market rate, it’s always important to have a back-up. Refinitiv achieves this by also sourcing data from the institutional market.
In the event there is a drop in liquidity that leads to data from the institutional market being used, it’s crucial that this technical change doesn’t lead to a movement in the rate. In order to protect against this risk, Refinitiv constantly compares the output generated by both data sources.
Figure 1 shows a comparison of Term SONIA using inter-dealer and institutional data. As you can see, the rates are nearly identical, with the average difference between the two being one or two hundredths of a basis point.
Figure 1
In the unlikely event there is a complete loss of liquidity in electronic trading of GBP SONIA OIS, Refinitiv can still publish a rate by adopting our integrated fallback.
This applies the change in compounded SONIA in advance to the previous day’s rate. The published rate did not use the integrated fall back during the prototype phase.
3. Easily accessible
The Refinitiv Term SONIA benchmark is widely accessible.
For those looking to use the rate on their desktop, it’s available through Eikon and Workspace using the identifiers GBPTRR1M=RFTB, GBPTRR3M=RFTB, GBPTRR6M=RFTB and GBPTRR1Y=RFTB for the one-, three-, six- and twelve-month tenors respectively.
The same identifiers can be used for real time and non-real time feed access, and for those without Refinitiv products, it’s accessible via our website. We are currently working with our extensive network of partner firms to ensure it’s delivered through your most popular applications and systems.
4. Now live and ready to use
From 11 January 2021, Refinitiv Term SONIA is administered by Refinitiv Benchmark Services (UK) Limited (RBSL), a wholly owned subsidiary of Refinitiv, in compliance with UK and EU Benchmarks Regulations.
From this date, licensed clients will be able to use the benchmark as a reference rate in financial instruments and financial contracts, and for valuation and pricing activities.
