FMSB Consults on Term SONIA Standard

The FICC Market Standards Board (FMSB) has published a transparency draft of a new Standard on use of Term SONIA (Sterling Overnight Index Average) reference rates, as published by the Bank of England. The new Standard applies to participants in the sterling fixed income and wholesale lending markets, including sterling legs of multi-currency products.

The UK authorities and the Working Group on Sterling Risk-Free Reference Rates have made clear they expect the use of such forward-looking benchmarks to be relatively limited. Instead, the expectation is that sterling fixed income and wholesale lending markets should predominantly transition to SONIA compounded in arrears as part of the move away from LIBOR. 

FMSB says, however, that there will be some circumstances where the use of a rate compounded in arrears is not appropriate or operationally achievable. To that end its latest Standard has therefore been developed with the aim of identifying where there may be robust rationales for using Term SONIA and sets out certain expected behaviours of market participants.

For example, Term SONIA, as with other term rates, may be valuable where market participants need advance knowledge and certainty of their interest rate obligations, or where the rate is used for discounting future cash flows such as in trade finance.

The Standard contains eight core principles. It says that, across lending and derivative products as well as bonds, market participants should assess whether there is a robust rationale when deciding to use Term SONIA. Additionally, banks and dealers should track and retain appropriate records of the volume of products, used or issued which reference Term SONIA. They should also ensure they have adequate policies, procedures, systems and controls in place to identify and mitigate any conflicts of interest which may arise.

Comprehensive risk disclosures should be provided by banks and dealers to end users to highlight any relevant risks associated with the use of Term SONIA and corporates and buy-side firms should assess whether there is a robust rationale for any requests made to dealers to provide products referencing Term SONIA.

Where market participants do use products referencing Term SONIA, the Standard says they should ensure that such products have robust fallback arrangements included within the contractual terms to allow orderly transition if Term SONIA were to be discontinued or declared non-representative.

“Interest rate benchmarks play an important role in FICC markets,” says Martin Pluves, CEO of FMSB. “As part of the transition away from LIBOR, UK authorities have been clear that markets should predominantly move to SONIA compounded in arrears, but also expect that Term SONIA will be sufficiently robust for selected applications where it is needed.”
Mark Yallop, chair of FMSB, adds, “This Standard has been created to assist market participants in determining when it may be appropriate to use Term SONIA and sets out clear principles of expected behaviours. We are very grateful for the engagement we have had to date with the Working Group on Sterling Risk-Free Reference Rates, as well as the Bank of England and FCA in producing this important Standard.”
FMSB members and other interested parties are invited to comment on the proposed Standard before it is finalised by FMSB. The consultation will run until 28 May 2021 with the final document is expected to be published shortly thereafter.