Written on: 24 March 2021

24 March 2021 – The FICC Markets Standards Board (“FMSB”) today publishes a Transparency Draft of a new Standard on use of Term SONIA reference rates

SONIA is the Sterling Overnight Index Average, as published by the Bank of England, and Term SONIA refers to forward-looking benchmarks. 

The UK authorities and the Working Group on Sterling Risk-Free Reference Rates have made clear they expect the use of such forward-looking benchmarks to be relatively limited. Instead, the expectation is that Sterling fixed income and wholesale lending markets should predominantly transition to SONIA compounded in arrears as part of the move away from LIBOR.  

However, there will be some circumstances where the use of a rate compounded in arrears is not appropriate or operationally achievable. 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. 

For example, Term SONIA, as with other term rates, may be valuable where market participants need advance knowledge and certainty of their interest rate obligations, or where the rate is used for discounting future cash flows such as in trade finance. 

The Standard contains eight core principles, which collectively cover: 

  • Across lending products, derivative products and bonds, market participants should assess whether there is a robust rationale when deciding to use Term SONIA. 
  • Banks / dealers should track and retain appropriate records of the volume of products, used or issued which reference Term SONIA. 
  • Banks / dealers should ensure they have adequate policies, procedures, systems and controls in place to identify and mitigate any conflicts of interest which may arise. 
  • Comprehensive risk disclosures should be provided by banks / dealers to end users to highlight any relevant risks associated with the use of Term SONIA. 
  • Corporates and buy-side firms should assess whether there is a robust rationale for any requests made to dealers to provide products referencing Term SONIA. 
  • Where market participants do use products referencing Term SONIA, they should ensure that such products have robust fallback arrangements included within the contractual terms to allow orderly transition if Term SONIA were to be discontinued or declared non-representative. 

This Standard applies to participants in the Sterling fixed income and wholesale lending markets, including Sterling legs of multi-currency products. 

Martin Pluves, CEO of FMSB, said: “Interest rate benchmarks play an important role in FICC markets. As part of the transition away from LIBOR, UK authorities have been clear that markets should predominantly move to SONIA compounded in arrears, but also expect that Term SONIA will be sufficiently robust for selected applications where it is needed”.  
Mark Yallop, Chair of FMSB, said: “This Standard has been created to assist market participants in determining when it may be appropriate to use Term SONIA and sets out clear principles of expected behaviours. We are very grateful for the engagement we have had to date with the Working Group on Sterling Risk-Free Reference Rates, as well as the Bank of England and FCA in producing this important Standard.” 

FMSB members and other interested parties are invited to comment on the proposed Standard before it is finalised by FMSB.  The consultation will run until 28 May 2021 with the final document is expected to be published shortly thereafter. 

Media contacts 
Andy Donald or Freddie Barber 
+44 207 379 5151 

Notes to Editors 

1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.  

FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets. 

FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets. 

FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants. 

All FMSB publications are available on the FMSB website at fmsb.com/our-publications/

2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.  

FEMR set FMSB four strategic goals: 

  1. Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks. 
  2. Developing best market practice through the production of standards and other materials that create a common understanding.
  3. Driving global adherence through ensuring standards are comprehensible and practical. 
  4. Developing consistent approaches to market practices through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies. 

3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities. 

4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique.  

The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/ 

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