ICE Benchmarks Launches SONIA Indices
Posted by Colin Lambert. Last updated: March 5, 2021
ICE Benchmark Administration (IBA) has launched a beta version of ICE SONIA Indexes for information and testing purposes, at the same time it has also published a methodology paper introducing the Indexes.
The new indices provide a daily value that represents accrued compound interest relative to the first day value of 100 on April 23, 2018, the date when the Bank of England took over responsibility for SONIA, and offer additional optionality to add a floor and lookbacks. The Indices have been developed to support the varying needs of the UK lending market and are designed to provide a simple method for parties to calculate SONIA compound interest between any two index dates and agree on their associated interest accruals, ICE says.
IBA has applied two operational and economic features to generate 10 possible indices. The first is the zero % floor, which addresses concerns around potential negative interest rates in the future, and can incorporate a minimum SONIA rate of 0%. If the daily SONIA value falls below 0%, the ICE SONIA Indexes can be calculated using 0% as a floor, instead of the actual SONIA value.
The second is lookbacks, which will help manage cash flows and address operational issues associated with the determination of repayments on loans before the end of a loan accrual period or the loan term. IBAS says the indices support multiple lookback approaches, and that it will offer indexes calculated using lags and/or shifts of either two or five business days, alongside the option of having no lookback.
To facilitate accounting for loan accruals on reporting dates that are not business days, all ICE SONIA Indexes will provide index values for every calendar day. Index values for non-business days will be published on the next following business day, IBA says.
“IBA has created the ICE SONIA Indexes to help address the key operational considerations of lenders and borrowers for SONIA-based loans,” says Tim Bowler, president of ICE Benchmark Administration. “The transition to SONIA in the UK lending markets has led to calls for SONIA indices that can be used to help calculate and process interest accruals from both a lender’s and borrower’s perspective. We believe the ICE SONIA Indexes can play an important part in helping lenders and borrowers as they transition to SONIA.”