BoE assumes control of interest rate benchmark

The Bank of England (BoE) is taking charge of one of the UK's interest rate benchmarks, in a bid to improve its governance and reliability.

The BoE today (April 13) said it will take "overall responsibility" for the Sterling Overnight Index Average (Sonia), including oversight and governance, from April 25. The Wholesale Markets Brokers' Association (WMBA) will continue its current role in calculating and publishing the index.

Sonia is particularly important to the BoE for gathering information on the effectiveness of monetary policy, as it tracks the policy rate closely – usually within 10 basis points.

The central bank noted in a consultation in 2015 that while Sonia plays a "critical role", it is based on data from a relatively narrow – and shrinking – segment of the market.

Sonia is currently calculated as the daily weighted average interest rate of unsecured sterling overnight cash transactions worth more than £25 million brokered in London by contributing members of the WMBA.

A major step the BoE plans once it has taken charge is to widen the pool of submissions, "in view of the limited size of the market for brokered deposits". The plan is to include bilaterally negotiated contracts as well as brokered contracts in future.

The BoE pointed out in its consultation that it is not regulated by the Financial Conduct Authority, though it said today it would administer Sonia in line with the International Organization of Securities Commissions' principles for financial benchmarks.

The reforms to Sonia are part of a broader effort by the BoE to collect better data on sterling money markets. "This information will provide the Bank with a better understanding of developments in short-term interest rates, benefiting the Bank's analysis of both monetary and financial conditions," it said in a consultation in July 2015.

The central bank plans to publish more detailed proposals for Sonia reforms in the "late summer" of 2016, with the aim of moving Sonia to the new method in the second quarter of 2017.