UK markets board publishes Term Sonia standards

The UK financial standards board has published its guidelines on the use of Term SONIA reference rates, marking the latest step in the transition from Libor.

The FICC Markets Standards Board, which lists as members many of the world’s top banks and corporates, said on Wednesday it has finalised its standard on the use of Term Sonia reference rates following a consultation that started when the FMSB published its transparency draft in March.

The Board said in a statement that “certain minor changes” had been made in response to feedback, including around the regulation of the benchmark, but “no changes were required … to the proposed ‘use cases’ for Term Sonia”.

UK regulators want firms to use Sonia rather than the forward-looking Term Sonia but the FMSB said in its statement on Wednesday: “There will be some circumstances where the use of a rate compounded in arrears is not appropriate or operationally achievable.”

The FMSB added: “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.”

The use of Term rates is a contentious subject because regulators want firms to use their nominated risk-free-rates rather than their forward-looking versions but Term rates are coming into favour.

The Alternative Reference Rates Committee (ARRC) in the US published last week its Best Practices for Use of Forward-Looking SOFR Term rates, which apply to the US Secured Overnight Financing Rate (SOFR).

Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley, said: “Once the SOFR First swaps convention switches on July 26 and the ARRC formally recommends the SOFR Term Rates, market participants should have what they need to use SOFR in all its forms across financial markets, including the use of the SOFR Term Rates for business loans.”

CME Group, the ARRC’s designated Term SOFR provider, welcomed the guidance, adding that it will allow the SOFR Term Rate to be licensed for derivatives in line with the ARRC standards.

Bloomberg launched in October last year its Bloomberg Short-Term Bank Yield (BSBY) index as a credit sensitive rate that addresses problems with the SOFR rate.

But Gary Gensler, the new chair of the SEC, laid into BSBY last month, arguing it has some of the “same flaws as Libor”.

A paper published by consultancy Sia Partners this month found that US efforts to transition to SOFR have significantly lagged the UK's switch to Sonia, leaving the US regulator and working groups in a game of “catch-up”.