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FTSE Russell £SONET Sterling Secured Overnight Executed Transactions
Update: February 2017
Contacts: Oliver Huggins & Chris Woods Phone: +44 20 7797 1000 Email: [email protected]
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Disclaimer
This document has been provided to you for informational purposes only and is intended as a broad overview of certain aspects of the proposed £SONET rate. All information and
opinions of whatsoever nature contained herein are preliminary and remain at all times subject to definitive documentation and regulatory review, where applicable. This document
does not, and does not purport to, contain a detailed description of any aspect of the £SONET rate or any other topics discussed in this document, and it has not been prepared for
any specific person. This document does not, and does not seek to, constitute advice of any nature. You may not rely upon the contents of this document under any circumstance and
should seek your own independent legal, investment, tax and other advice. The information and any opinion contained in this document do not constitute a recommendation or offer
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The contents of this presentation are based on advanced plans as developed to date, but subject in all cases to definitive documentation and regulatory review, where applicable.
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index constitutes an offer to buy or sell, or a promotion of, a security. This presentation is solely for informational purposes. Accordingly, nothing contained in this presentation is
intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of making any investment through our indexes.
About FTSE Russell
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For more information, visit www.ftserussell.com.
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Contents
Executive summary Page 4
Developments since November 2016 Page 5
£SONET: Risk-Free Rate Page 6
Appendix Page 20
Page 3
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£SONET: Executive summary
• The FSB published its report on interest rate benchmark reform in July 2014 (following direction from the G20)1
• In the UK, the Financial Conduct Authority is overseeing the reform of LIBOR and the Bank of England is
overseeing the development of sterling risk free rates (RFRs). The BoE has convened a Working Group to look
at alternative RFRs
• The Bank of England have written a letter to the Working Group expressing a desire for a
recommendation on the sterling risk free rate in Q1 2017 2
Background
and Timing
Current
Activities
Risk Free Rate
Candidates
• A number of alternative rates have been considered by the Bank of England Working Group including:
– ‘Reformed SONIA’, an unsecured rate to be administered by the BoE
– £SONET, FTSE Russell’s secured rate candidate
• The LSEG £SONET team presented to the BoE Working Group on 2nd November 2016. Following this, LSEG
has worked closely with a WG delegation to test and refine £SONET
• £SONET reflects the dynamics of the secured funding market and captures a significant portion of daily
activity (up to £85 billion per day)
• The RFR must be able to support an OIS transition that can plausibly take place over two to three years2
• FTSE Russell plans to publish an indicative version of £SONET in Q1 2017, in line with BoE timelines
• The £SONET team is now engaging market participants on the features and use of £SONET and possible OIS
transition path
[1] http://www.fsb.org/wp-content/uploads/r_140722.pdf
[2] http://www.bankofengland.co.uk/markets/Documents/sterlingoperations/rfr/2016/letter061216.pdf
LSEG welcomes any feedback or thoughts on £SONET
Market participants are encouraged to provide feedback via [email protected]
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• In November and December 2016, the £SONET team worked closely with the Working
Group to scrutinise and refine the £SONET methodology. Analysis covered:
– Provenance and dynamics of rate ‘spikes’
– Relative dynamics of £SONET and SONIA, especially in periods of monetary policy
activity (e.g. Quantitative Easing)
– Dynamics of over a dozen different calculation methodologies focussing on spike
days, Bank Rate cut days and IMM days
– Effect on the £SONET rate of the sub-components that make up the repo dataset:
DBV, GC, Specifics and Special transactions; cleared and uncleared
– See the appendix for a sample of the analysis performed
• As a result we have refined the Methodology of £SONET:
– £SONET will be calculated using a Volume Weighted Average with 25% iterative
filtering across all trades
• The Methodology will be reviewed periodically by the £SONET Advisory Committee in the
future, to ensure £SONET continues to capture the market
• FTSE Russell is in the process of setting up the £SONET Advisory Committee. The first
meeting is expected to take place in Q1 2017
• The focus of the £SONET team is now on engaging stakeholders on the utility of £SONET
and how the OIS market may transition from an unsecured benchmark to a secured
benchmark, should a secured benchmark be chosen
£SONET: Developments since November 2016
LSEG welcomes any feedback or thoughts on £SONET
Market participants are encouraged to provide feedback via [email protected]
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£SONET: Risk Free Rate
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FTSE Russell For use as the risk free
rate for sterling markets
• To benchmark the daily funding activity of commercial banks and other participants
• To underpin the discounting of long term sterling cash flows
• As a reference rate for use in derivative and other contracts
Priced to encourage
widespread adoption
• Historical data will be published to encourage participant engagement
• Made widely available throughout the industry on a FRAND basis
Resilience to
manipulation through
multiple ‘lines of
defence’
• By design: 25% iteratively filtered Volume Weighted Average
• £SONET will benefit from FTSE Russell’s comprehensive governance structure
• £SONET Advisory Committee to include market participants (buy and sell side)
• Compliance with EU Benchmark Regulation and IOSCO
Will benefit from the
support of LSEG’s range
of capabilities
• Benefitting from the full suite of capabilities within LSEG: Index Administration,
Execution Facilities and Post Trade
• In partnership with market participants and other infrastructure providers through our
Open Access model
£SONET is a measure of sterling risk free overnight funding
£SONET will launch in Q1 2017
Page 7
£SONET: Overview
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£SONET: Benefits for market participants
[1] Source: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q306.pdf
[2] Source: http://www.bankofengland.co.uk/markets/Documents/sterlingoperations/rfr/2016/letter061216.pdf
£SONET as a secured overnight risk free benchmark
Proxy for
derivatives
funding
• Aligns to actual
funding practice
• Over £1 trillion1 of
GBP derivatives daily
Represents actual
activity
• Up to £85 billion daily
• Secured funding and
commercial lending
• Wide participant
base
Continuing
relevance in the
future
• Secured funding
highly likely to
remain widely used
• £SONET Advisory
Committee role
Resilient volumes
in stressed
markets
• Secured lending
volumes more likely
to remain stable than
unsecured
Page 8
Initial buy-side feedback indicates that a secured rate is the most appropriate choice
for Sterling Risk Free Rate
£SONET aligns to actual daily derivatives funding practice and is ‘opposable’, unlike £LIBOR
£SONET captures a significant portion of the secured market (up to £85 billion in daily volume; c65% market
coverage)
£SONET methodology is designed to be robust against risks of manipulation, and the governance model ensures
integrity and ongoing relevance
Given the ultimate objective of the Working Group to move a significant portion of derivatives from LIBOR to the
RFR2, it is imperative to make the correct choice of RFR in the first instance
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£SONET: Definition
• The rate is defined in two parts, to facilitate the evolution of the benchmark in the future without disruption to contracts and
processes that use it:
– The Underlying Interest is an enduring statement of the economic concept that £SONET seeks to measure
– The Methodology describes how the UI is currently measured, including inputs and calculation
• This structure allows for the future evolution of the Methodology, in consultation with the £SONET Advisory Committee, without
requiring a change in the Underlying Interest
£SONET Definition
Underlying Interest • Sterling SONET is a measure of the sterling risk free reference rate for secured overnight
funds
Methodology
• Iteratively filtered1 (removing 25% volume from all trades) Volume Weighted Average of the interest
rates on:
– Sterling cleared and uncleared repo transactions secured against government securities
– With one business day maturity
– To settle on the day that is used in the £SONET index calculation
– There is no minimum transaction size
Monitoring and
Maintenance
• The Methodology has been determined in conjunction with expert market practitioners. It is
representative of the repo market, in particular on dates where some differentiation is apparent
between DBV, GC and Specific Repos
• The Methodology will regularly be reviewed under the direction of the FTSE Russell £SONET
Advisory Committee, who may then recommend methodology adjustments to ensure £SONET
continues to be an appropriate reflection of the sterling repo market
[1] All data is aggregated and transactions ranked by rate in descending order (highest to lowest) prior to calculating . VWA is calculated for the entire dataset . The transaction with repo rate furthest from the calculated VWA is
then removed from the data set. The new VWA of the remaining trades is calculated. The process is repeated, and transactions removed until 25 percent of the original volume has been removed.
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• From 1 July to 16 September 20161:
• £SONET has a peak transaction volume of £68bn
• The mean daily transaction volume was £56bn,
with an average of 1200 daily trades
• We estimate £SONET covers 64% of the total market2
£SONET market coverage: average daily volume and number of trades
£SONET Reformed SONIA
Mean daily transaction volume (£bn) 56 36
Mean trade size (£m) 47 113
Median trade size (£m) 24 50
Mean daily number of trades 1198 322
[1] This period was chosen to be in line with BoE ‘The reform of SONIA’ consultation paper. More history is available.
[2] As at 9th December 2015. See appendix for further details.
[3] Reformed SONIA data only available to 16/09/16
Source: LSEG internal analysis for period 01/07/16 – 16/09/16
Source: BoE October 2016 paper ‘The reform of SONIA’ and supporting data; and LSEG internal analysis. Reformed SONIA volumes contain full population contributing to SMM from 1st July 2016
Page 10
£SONET: Market coverage
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
bn
10 bn
20 bn
30 bn
40 bn
50 bn
60 bn
70 bn
80 bn
Feb 2016 Apr 2016 Jun 2016 Aug 2016 Oct 2016 Dec 2016
No. of trades Volume Daily Transaction Volumes3
£SONET (LHS) Reformed SONIA (LHS) Reformed SONIA (RHS) £SONET (RHS)
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Responsible for
administration and
calculation
• FTSE Russell will agree terms with data suppliers (including codes of conduct where
appropriate)
• Maintain oversight arrangements
• Calculate the rate and ensure appropriate contingency arrangements are in place
Consistent with IOSCO
Principles for Financial
Benchmarks
• FTSE Russell is fully IOSCO compliant, and £SONET will be administered according
to these principles
• FTSE Russell IOSCO statement can be viewed at:
http://www.ftse.com/products/indices/iosco
Consistent with
European benchmark
regulation
• FTSE Russell will apply for FTSE International Ltd to be authorised as a benchmark
administrator under the European Benchmark Regulation
• These regulations can be viewed at:
http://ec.europa.eu/finance/securities/benchmarks/index_en.htm
Benefit from external
assurance
• FTSE Russell routinely commissions externally assured reports on its internal
controls; £SONET will be included in such reports
£SONET will be administered by FTSE International Ltd
Page 11
£SONET: Administration
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Internal Working Groups:
• Extensive operations experience and in-house research
teams to analyse and advise
• Consider operational aspects of the maintenance of the
benchmark including the design of controls and procedures
• Evaluate the operational feasibility of proposed methodology
enhancements
FTSE Russell Governance Board:
• Benefits from many years experience overseeing some 80
index families
• Provides ultimate oversight of methodologies and approval
of proposed enhancements, following input from internal
working groups and external advisory committees
External Advisory Committees:
• £SONET Advisory Committee to benefit from the continued involvement of BoE Working Group
members, users, and key stakeholders (the BoE to be invited in an observer capacity)
• Chaired by a senior independent practitioner
• Two way conversation between Committee and FTSE Russell Governance Board
• The Committee will ensure that benchmarks are managed and calculated according to the
published methodology, and maintain the methodology under review to ensure that £SONET
continues to meet market needs and accurately reflects the underlying market
The £SONET Advisory Committee will meet quarterly and discuss any changes that may be required
Page 12
£SONET: Governance
Index
methodology
group
Methodology &
procedures
implementation
group
Security events
advisory group
External
Committees
FTSE Russell Governance
Board
FTSE Russell
Policy Advisory
Board
Equity Advisory
Committees
Asia Pac
EMEA
Americas
Other
Committees
ICB
Country
Classification
Nationality
Fixed Income
Committees
£SONET
EMEA
Americas
Partner Advisory
Committees
FTSE
NAREIT
FTSE ST
Bursa
Malaysia
FTSE ESG
FTSE EPRA
NAREIT
FTSE JSE
External Internal
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£SONET: Publication, republication & contingency
Daily Publication
• £SONET will be published on the same day at 21:00 GMT
• £SONET rate will include transactions between 00:00 and 18:00 GMT
• Alongside the £SONET rate, FTSE Russell will publish additional
information:
– Total volume & number of transactions; and
– Additional rate statistics
Contingency Arrangements
• FTSE Russell will publish a daily rate in all circumstances, and has in place
robust fallback solutions for calculation and data sourcing
• Where circumstances require, FTSE Russell will publish a short term
contingency rate following the published contingency plan methodology, to be
determined in consultation with the £SONET Advisory Committee (including
market participants)
• If the underlying economic reality changes such that £SONET is no longer
reflective of the underlying market, FTSE Russell will work alongside the
£SONET Advisory Committee to determine the appropriate evolution of the
£SONET methodology
Surveillance & Data Validation
• Ex-ante data checks, validation & market surveillance will be undertaken
• FTSE Russell will perform end-of-day analysis on data provided and
investigate any anomalies as required
Republication Arrangements
• Where an error is identified in the £SONET published rate, FTSE Russell
propose to republish only if correction of the error results in a material rate move
of 2 basis points or more
• In all circumstances, any republished rate would be made available at 09:00
GMT the following day
00:00
T0
18:00
T0
£SONET publication
21:00
Daily transaction window
21:00
T0
Data validation
09:00
T+1
Republication if required
09:00
£SONET will benefit from FTSE Russell 24 hour global client service and operational support
Page 13
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DATA TRANSFER
Robust Control Framework
• Audited control frameworks around creation
and delivery of data file
• Documentation and training of individuals
involved in the submissions process
Ex-Ante and Ex-Post Analysis
• Analysis of combined data set:
– time series trend analysis
– daily cross-sectional analysis
• FTSE Russell will also perform daily analysis
of:
– Min, Max, Mean, SD
– Total Volume
– Basis
– Outliers
• Any data that fails checks will be flagged and
investigated
ADMINISTRATOR CONTRIBUTOR
Ex-ante checks
• Contributors are best placed to perform ex-
ante checks on the integrity of the data:
– Earlier sight
– Counterparty information
– Timestamps
• Checks that may be performed:
– Nil / 0 rates (may be valid)
– Trades cancelled or amended after feed
snap
– Fat finger errors
Trade size required to move rate 1 bp £SONET is difficult to influence by design. As a result, a
significant volume of manipulative trades are required to shift
the rate:
• On average over 2016, a trade of £21bn would be
required to move the rate by 1 basis point. This is over
800x the median daily trade size
• Over 2016, the minimum trade size required to move the
rate by 1 basis point is £2.6bn, 100x the median trade size
for that day
£SONET is difficult to influence by design
Supported by targeted and robust surveillance frameworks
Source: LSEG internal analysis
Page 14
£SONET: Surveillance
0 bn
10 bn
20 bn
30 bn
40 bn
50 bn
60 bn
70 bn
80 bn
01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16
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£SONET will be:
Priced to encourage widespread adoption
Made widely available throughout the industry
Pricing Strategy
• £SONET will be made available on a FRAND basis
• Charges will be structured to encourage adoption
• Partners will be incentivised to contribute and make the rate viable
• Usage will be licensed, with incentives to encourage early adoption of the benchmark rate
Pricing will be structured to encourage adoption of £SONET
and drive liquidity
£SONET: Pricing
Page 15
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-15
-10
-5
0
5
10
15
20
25
30
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017
Bp Basis Rate % SONIA vs £SONET vs Base Rate
Basis Reformed SONIA vs £SONET (RHS) £SONET (LHS) Reformed SONIA (LHS) Current SONIA (LHS) Bank Rate (LHS)
Page 16
£SONET: Market dynamics Feb 2016 – Jan 2017
A direct comparison of £SONET, Reformed SONIA (trimmed VWA), Current SONIA and the Bank Rate,
between February 2016 – January 2017
Source: BoE February 2017 paper ‘The reform of SONIA’ and supporting data; Bloomberg; and LSEG internal analysis. Reformed SONIA volumes contain full population contributing to SMM from 1st July 2016
-0.5949
77
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(10.00)
(5.00)
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Nov 2011 May 2012 Nov 2012 May 2013 Nov 2013 May 2014 Nov 2014 May 2015 Nov 2015 May 2016 Nov 2016
Bp Basis Rate % Three-month compounded SONIA vs £SONET
Basis (RHS) 3 month Compounded SONIA (LHS)
Page 17
£SONET: Three-month compounded rate Nov 2011 – Jan 2017
A comparison of three-month compounded £SONET and current SONIA
Source: Bloomberg and LSEG internal analysis.
£SONET SONIA
Correlation of daily
change 0.79
Annualised daily
volatility (%) 6.41 4.30
Average absolute
daily basis (bps) 2.11
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£SONET: Transition
[1] Source: http://www.bankofengland.co.uk/markets/Documents/sterlingoperations/rfr/2016/letter061216.pdf
A feasible, market led transition plan is required 1
• Initial buy-side feedback indicates that a secured rate is the correct choice for Sterling Risk Free
Rate
• Given the ultimate objective of the Working Group to move a significant portion of derivatives from
LIBOR to the RFR1, it is imperative to make the correct choice of RFR in the first instance
• The requirement is for “an OIS transition that would plausibly succeed over 2-3 years” 1
• LSEG can seek to support the process of a smooth, market-led migration of the OIS market from
SONIA to £SONET
– With Group’s full suite of capabilities through our Open Access model;
– Combined with adoption by market participants and support from regulators; and
– A viable transition roadmap
We have developed a path to transition which could plausibly succeed over 2-3 years
Page 18
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£SONET: Transition summary timeline
• An OIS market Transition will progress in four stages;
1. Building £SONET spot market usage: Use of the overnight index among market participants
2. Term extension & OIS Transition: A liquid market in the short term OTC OIS and futures markets develops. Clearing of
£SONET OIS products could facilitate transition of SONIA OIS liquidity to £SONET OIS. Depth in the spot market could stimulate
demand for a term hedging market
3. Move £IRS discounting to £SONET: Transition the discounting of cleared sterling instruments to £SONET
4. LIBOR alternative: Compound overnight £SONET and/or ‘Term £SONET’ as the reference rate for contracts
• Timely initial liquidity build in £SONET OIS is crucial to establish clearing eligibility within the prescribed timeframe
2017 2018 2019 2020
£SO
NET
Lau
nch
1
1: Spot £SONET market usage develops
2: Term extension & OIS Transition
£SONET OIS market sufficiently liquid
to support £IRS discounting
4: £LIBOR
alternative
3: Transition £IRS discounting to
£SONET
£SONET OIS to clear from inception,
supporting liquidity build
[1] Indicative £SONET rate launched Q1 2017 Page 19
A detailed plausible pathway to transition has been developed and the £SONET team are engaging market participants
Potential roadmap (in consultation with market participants and BoE):
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Appendix
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Total Sterling Gilt Repo Market Size: c.£432 bn[1]
Sources and notes:
1. Derived from ICMA Euro market survey. Represents total value of repo contracts outstanding as at Dec 9th 2015. Survey quotes total market size as EUR 5,608bn, with 10.6% of that against collateral
issued by the UK govt. Converted into GBP at an exchange rate of 1.377 this gives a total market size of c.£432bn
2. LSEG best estimate
3. Figure estimated by taking all other known data and assumptions in terms of cleared repo, uncleared DBV and triparty and subtracting from the total estimate. Assumption made that all uncleared business in
specific gilt repo is for term based on anecdotal evidence from voice brokers and further assumption that majority of this business is bank-client rather than interbank.
4. Based on EUI data from 2015/16 – all DBV repo contracts open as at 9th December 2015
5. Estimated based on market-wide observation in the ICMA report which stated that 54% of all repo business was executed direct with counterparties of which 11% was triparty. Furthermore the report noted
that some 17.2% of triparty repos were conducted on an O/N basis
Cleared (£bn outstanding 9th Dec 2015)
Uncleared (£bn outstanding 9th Dec 2015)
o/n Term Total o/n Term Total
Sp’fic
Platform 55 4 59
Direct 8 66 74 20 [2] 118 138 [3]
DBV
Platform 5 5
Direct 3 48 51 51 29 80 [4]
Triparty Direct 4 21 25 [5]
Total 71[A] 118 189 75[B] 168 243
= Relevant flow; within our dataset = Potentially relevant flow; not within
our dataset
Key:
• As at 9th December 2015, the total estimated daily execution
volume for the Sterling Gilt Repo Market is c.£85bn (35.5+49.5)
• Index volume on this date was £54.7bn representing c.64%
of the total relevant market
Relevant Market Size
A. Cleared trades are counted ‘gross’: i.e. each bilaterally traded
contract is counted as 2 separate repos
Total value traded in cleared o/n is therefore:
£35.5bn (71.5/2)
B. ‘Uncleared Direct DBV’ figure includes approx. 50% stock
lending transactions on average, resulting in c.£25.5bn (51/2)
‘uncleared direct DBV’
Therefore, the total value traded in uncleared o/n repo is
c.£49.5bn (20+25.5+4)
Conclusion
Page 21
£SONET: Market coverage
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• The purpose of the analysis was to determine which of the alternative methodologies consistently generated a £SONET rate
which most closely reflected where the market is trading
• In particular the aim was to manage the impact of Specials which may be manifest in the Specifics transactions, and might bias
the rate
• We looked at the history of all the transactional data across the historical data set, breaking out the impact of GC, Specifics and
DBV transactions
• For almost all the days in the history there was very little basis between the methodologies, and little differentiation
between the different sub-portfolios of transactions
• However, a small number of days in the five year history show some dispersion in the data. Those days were analysed in detail
to determine which methodology provided the most appropriate rate
• On the following pages we show the detailed analysis for two of those days: 31/12/2015 and 30/12/2011
£SONET: Analysis of sub-component dynamics Summary of work undertaken in Q4 2016
We looked at a range of methodologies:
Volume Weighted Median (VWM)
Volume Weighted Average (VWA)
VWA Specific-only Filtering – a specified percentage of transaction volume is removed from the
Specific sub-portfolio, then the VWA of the aggregate remaining data is taken. Filtering can either be on
the downside of the specifics data only, or from both sides of the distribution according to an iterative
algorithm. A range of percentages were considered.
VWA All Filtering – As above, but the filtering is applied to the entire aggregate dataset rather than just
the specifics sub-portfolio.
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£SONET: Analysis of sub-component dynamics
Sample 1: 31 Dec 2015
0%
5%
10%
15%
20%
25%
30%
<-50 <-40 <-30 <-20 <-10 <0 <10 <20 <30 <40 <50 <60 <70 <80 <90 <100
DBV, GC & Spec
DBV & GC
DBV
% Filtered VWM VWA
Specific Filtering
VWA All filtering
0 0.0500 0.0371 0.0371
25 - 0.0978 0.0254
DBV Only VWM: 0.1500
VWA: 0.2583
• The histogram shows the full dispersion of transaction rates for 31/12/2015, a date on which the market clearly ‘spiked’ downwards to the 0-
10bp level from a previously stable level of c.50bps
• It is apparent from the histogram and rate calculations that:
– There is some Specialness emerging within the Specific portfolio (seen in the long tail on the LHS)
– There is also noise in the DBV market: some of the transactions continue to take place at the 30-70bp level, even when the bulk of
the market has clearly dropped to 0-20bps. This is reflected in the difference between the ‘DBV only’ VWM and VWA calculations in
the table
• Other dates were analysed in the same way and we observed that,
– The Specialness seen above emerged mostly in the latter period (2015-16) and was not particularly evident in the early years
– Conversely the bifurcation effect in the DBV market was very pronounced in some of the older sample dates (see next page)
Rate calculations Transaction rates by repo type on 31/12/2015
Source: LSEG Internal Analysis
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% Filtered VWM VWA
Specific Filtering
VWA All filtering
0 0.2200 0.2511 0.2511
25 - 0.2625 0.1671
DBV Only VWM: 0.450
VWA: 0.3173
Rate calculations
• The histogram shows the full dispersion of transaction rates for 30/12/2011, a date on which the rate spiked down at year end. It is apparent
from the histogram and rate calculations that:
– DBV shows clear bifurcation, with approximately half of the market trading at 0-30bps and the rest remaining at 40-60bps
– No particular Specialness tail is evident in the Specifics
• The VWA All 25% Filtering calculation generates a £SONET rate of 16.7bps, which is representative of the GC transactions; the
Specific transactions, and the DBV transactions that have responded to the drop in the repo market rates
0%
5%
10%
15%
20%
25%
30%
<0 <10 <20 <30 <40 <50 <60 <70 <80 <90 <100
Transaction rates by repo type on 30/12/2011
DBV, GC & Spec
DBV & GC
DBV
The conclusion from the analysis of this and other dates is that VWA All 25% iterative filtering is the most appropriate choice of
methodology since it ‘prunes’ both sides of the distribution.
This pruning removes transactions that are significantly away from the bulk of the market, which may be evident in either the cleared
or uncleared data.
£SONET: Analysis of sub-component dynamics
Sample 2: 30 Dec 2011
Source: LSEG Internal Analysis
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£SONET Reformed SONIA
Defi
nit
ion
& R
isk P
rofi
le
Underlying interest • Sterling SONET is a measure of the sterling risk free reference rate for
secured overnight funds
• A measure of the rate at which interest is paid on sterling overnight wholesale funds in
circumstances where credit, liquidity and other risks are minimal.
Methodology
• The 25% iteratively filtered volume weighted average of the interest rates on:
– Sterling cleared and uncleared repo transactions secured against
government securities
– With one business day maturity
– To settle on the day that is used in the £SONET index calculation
– There is no minimum transaction size
• The trimmed volume weighted average (excluding ‘trimming’ the highest and lowest 25%
by volume of transactions) of the interest rates on unsecured wholesale one business day
maturity deposit transactions in sterling, settled same-day, as reported to the Bank’s
Sterling Money Market data collection, executed between 00:00 hours and 18:00 hours UK
time, with a minimum transaction size of £25 million.
Risk Profile
• Minimal credit risk: secured exposures
• Reflects the actual collateralised funding costs in the market
• Shows variance against the Bank Rate
• Embeds the credit riskiness of the participants
• Trades at a very stable spread to the Bank Rate
Calc
ula
tio
n &
pu
blicati
on
What transactions
are included?
• Scope of dataset: eligible transactions covered by cleared specific & GC
repos and Euroclear settled uncleared DBV trades
• Maturity & settlement: one business day maturity; O/N ,T/N , S/N settlement
• Execution window: executed between 00:00 – 18:00 UK time
• Minimum size: no minimum
• Geographic scope: worldwide
• Scope of dataset: eligible transactions reported to Bank’s Sterling Money Market (SMM)
data collection
• Maturity & settlement: one business day maturity, same day settled (spot)
• Execution window: executed between 00:00 – 18:00 UK time
• Minimum size: minimum transaction of £25 million
• Geographic scope: transactions booked in EEA branches of SMM reporting institutions
How is the rate
calculated? • 25% iteratively filtered Volume Weighted Average
• 50% Trimmed Volume Weighted Median (excluding ‘trimming’ the highest and lowest 25%
by volume of transactions)
What are the
publication
arrangements?
• £SONET will be published same day at 21:00
• Republication if change causes a 2 basis point or greater move in rate.
Republication to occur at 09:00 GMT (t+1)
• Alongside the headline rate (to 4dp), FTSE Russell will publish volume of
transactions and additional rate statistics
• Published 09:00 on following day
• Headline rate (to 4dp) alongside aggregate volumes & 10th, 25th, 75th & 90th percentiles
published [tbc by Bank]
• Republished if change in the underlying distribution causes a 2 basis point or greater move
in rate. Deadline for republication is 16:00.
• Contingency calculation methodology will use the Bank Rate with the addition of an
average of the spread to SONIA over some recent period.
Featu
res Governance
• Benchmark will be administered in compliance with the IOSCO Principles and
the forthcoming EU Benchmark Regulation
• £SONET Advisory Committee to form integral part of Governance structure
• TBC
Surveillance • Ex-ante checks by contributors & ex-ante and ex-post analysis by FTSE
Russell • Surveillance of underlying SMM reported transactions
Transition strategy • See slides 18 & 19 • Point in time switchover from SONIA to Reformed SONIA, in March/April 2018.
Source: BoE October 2016 paper ‘The reform of SONIA’; BoE February 2017 paper ‘The reform of SONIA’ ; LSEG internal analysis
£SONET: SONIA comparison
Page 25
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Source: BoE and LSEG internal analysis. Reformed SONIA volumes contain full population contributing to SMM from 1st July 2016. Reformed SONIA data only available to 03/03/2017
Note: £SONET data provider systems update as at 1st January 2017 and 22nd March 2017
Page 26
(100)
400
900
1,400
1,900
2,400
0 bn
10 bn
20 bn
30 bn
40 bn
50 bn
60 bn
70 bn
80 bn
90 bn
100 bn
110 bn
Feb 2016 Apr 2016 Jun 2016 Aug 2016 Oct 2016 Dec 2016 Feb 2017 Apr 2017 Jun 2017 Aug 2017
No. of trades Volume Daily Transaction Volumes
£SONET (LHS) Reformed SONIA (LHS) Reformed SONIA (RHS) £SONET (RHS)
£SONET data includes all overnight cleared repo (overnight, tomorrow next, spot next); and uncleared
overnight direct DBV repo. Currently uncleared specific and triparty transactions are not included
August Update: £SONET Market coverage: January 2016 – August 2017
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Source: BoE and LSEG internal analysis. Reformed SONIA volumes contain full population contributing to SMM from 1st July 2016. Reformed SONIA data only available from 01/02/2016 to
03/03/2017
Note: £SONET data provider systems update as at 1st January 2017 and 22nd March 2017
Page 27
£SONET data includes all overnight cleared repo (overnight, tomorrow next, spot next); and uncleared
overnight direct DBV repo. Currently uncleared specific and triparty transactions are not included
0bn
20bn
40bn
60bn
80bn
100bn
120bn
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17
Volumes Volumes: SONIA vs Reformed SONIA vs £SONET
£SONET Current SONIA Reformed SONIA
August Update: £SONET Market coverage: January 2016 – August 2017
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August Update: £SONET Market dynamics: January 2016 – August 2017
A direct comparison of £SONET, Reformed SONIA, Current SONIA and the Bank Rate,
between January 2016 – August 2017
Source: BoE, Bloomberg, and LSEG internal analysis. Reformed SONIA volumes contain full population contributing to SMM from 1st July 2016. Reformed SONIA data only available from
01/02/2016 to 03/03/2017
Note: £SONET data provider systems update as at 1st January 2017 and 22nd March 2017
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17
Rate % Rates: SONIA vs Reformed SONIA vs £SONET vs Base Rate
£SONET Current SONIA Reformed SONIA Bank Rate
