What is SONIA (Sterling Overnight Index Average)?

SONIA, or the Sterling Overnight Index Average, is a benchmark interest rate that serves as an alternative to LIBOR (London Interbank Offered Rate) for British Pound Sterling (GBP)-denominated transactions. SONIA is based on actual overnight funding transactions in the unsecured market, providing a reference rate that reflects the average interest rate at which banks lend to each other on an unsecured basis overnight. It represents a broad measure of overnight funding rates in the UK money markets.

Unlike LIBOR, which represents interbank lending with a credit risk component, SONIA is based on unsecured transactions, meaning that the lending is not collateralized by specific assets. It is widely used as a reference rate for various financial products, including floating-rate loans, derivatives, and other contracts. It is considered a key benchmark for the UK financial markets.

SONIA is calculated as a volume-weighted average of interest rates on unsecured overnight transactions, which are sourced from a broad and diverse panel of banks. The calculation includes data on actual transactions, making it a robust and transaction-based benchmark. It is typically published by the Bank of England at or around 9:00 a.m. London time on the following business day.

There have been discussions and efforts to develop additional tenors for SONIA. The extension to different tenors beyond the overnight rate is aimed at providing a reference rate for a wider range of financial products with varying maturities. In particular, the focus has been on developing forward-looking term rates based on SONIA.