FMSB Publishes Final Sonia Standard

The FICC Markets Standards Board (FMSB) has published the finalised Standard on use of Term Sonia reference rates.

The Standard was initially published as a transparency draft in March and FMSB says since then, UK regulators have provided supportive references, including in a joint “Dear CEO” letter on transition from Libor to risk free rates from the UK’s Prudential Regulatory Authority and Financial Conduct Authority stating that firms should consider this Standard in selecting benchmarks. The Standard was also referenced in a recent speech by the governor of the Bank of England, Andrew Bailey.

FMSB says certain minor changes have been made to the final Standard in response to comments received during the transparency period, such as clarifying the relationship between the Standard and applicable benchmark regulations, however, its Working Group determined that no changes were required to be made to the proposed ‘use cases’ for Term Sonia.

The UK authorities and the Working Group on Sterling Risk-Free Reference Rates have made clear they expect the use of 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.

That said, FMSB says there will be some circumstances where the use of a rate compounded in arrears is not appropriate or operationally achievable. “This 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,” it states.