The administrator of SONIA (Sterling Overnight Index Average) is the Bank of England and was first introduced in March 1997. It reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial organisations. SONIA interest rate is used to calculate the interest paid on swap, transactions and sterling floating rate notes.
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About SONIA Interest Rate
The interest rate benchmark
SONIA interest rate is a more complex structure. In other words, it doesn’t have different curves for different maturities and it incorporates daily compounding, weighted averaging, end of period setting and a 5 day lag period.
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Managing this and applying it in a systematic orderly fashion to individual loans and swaps is difficult. In addition, it is also challenging to create EXCEL templates. Add in the requirement to calculate accruals on the back of this methodology, then it becomes even more challenging to record, administer, apply and manage your loan portfolio.
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LIBOR to SONIA Transition
It doesn’t need to be painful
“Following our update to the software, as a result, our clients will be able to migrate from one reference rate to the other but it’s our job to make that as smooth as possible. Our system changes make the process pretty straightforward for the clients.”
“However our clients are likely to have a series of loans and swaps that are currently tied to LIBOR interest rate, plus or minus a margin, and they’re going to have to swap those out and link them to SONIA interest rate at some point in the future.”