Sterling Overnight Index Average (SONIA)

Key takeaways

• SONIA is the Bank of England’s benchmark for unsecured overnight sterling borrowing.
• It reflects the average interest rate for eligible overnight transactions among banks and large institutions.
• Revisions since 2016–2018 broadened its data coverage and changed the calculation to a volume‑weighted trimmed mean.
• SONIA is the preferred near–risk‑free reference rate for sterling markets and is widely used in derivatives, loans, and valuation.

What is SONIA?

The Sterling Overnight Index Average (SONIA) is the effective overnight interest rate for unsecured sterling transactions. Administered by the Bank of England (BoE), it represents the average rate paid on overnight interbank and large‑institution borrowing in the UK money market. SONIA is used as a benchmark in many financial contracts, including overnight index swaps (OIS) and other short‑term instruments.

Eligibility and scope

Transactions must meet these criteria to be included in SONIA:
* Reported daily to the BoE’s Sterling Money Market data collection.
Unsecured and maturing in one business day.
Same‑day settled transactions executed between 12 a.m. and 6 p.m. (London).
* Minimum deal size of £25 million.

SONIA covers both brokered and bilaterally negotiated overnight transactions, providing a broad picture of overnight unsecured funding activity.

How SONIA is calculated

The BoE calculates and publishes SONIA each business day using the previous day’s transaction data. Key steps:
1. Data collection by 7 a.m. from participating banks and institutions.
2. Data validation and formatting checks.
3. Calculation using a volume‑weighted trimmed mean methodology (trimming outliers to reduce distortion from very small or large trades).
4. Publication of the rate on the next business day (the BoE publishes the rate at 9 a.m.), and a compounded index is produced for use in compounded‑rate contracts.

History and methodology changes

• Launched in 1997 by the Wholesale Markets Brokers’ Association to stabilize overnight sterling funding rates.
• The Bank of England took operational control in 2016 and revised the methodology in 2018 to:
• Include both brokered and bilateral transactions reported via the Sterling Money Market data collection, and
• Adopt a volume‑weighted trimmed mean for the published rate.
• The SONIA Compounded Index was introduced and published daily beginning in 2020 to support contracts that reference compounded overnight rates.

Role in the transition away from LIBOR

As concerns grew about the reliability and integrity of LIBOR, market participants and regulators promoted alternative near‑risk‑free rates. A Working Group on Sterling Risk‑Free Reference Rates designated SONIA as the preferred sterling benchmark, leading to widespread adoption in sterling derivatives and loan markets. LIBOR has been phased out for most currencies; in U.S. dollar markets, the Secured Overnight Financing Rate (SOFR) serves a similar role to SONIA.

Uses and market significance

• Reference rate for sterling OIS and other derivatives.
• Benchmark for floating‑rate loans and debt instruments.
• Used in valuation and risk management; the BoE estimates SONIA is used to value trillions of pounds of assets annually.
• The SONIA Compounded Index enables use in contracts that require compounded overnight interest over a period (e.g., loans, repo, and some derivatives).

Conclusion

SONIA is the principal overnight unsecured sterling benchmark, providing a transparent, transaction‑based reference rate for the UK money markets. Its evolved methodology and broad coverage make it the standard near‑risk‑free rate for sterling instruments and a central component of post‑LIBOR market infrastructure.