Minutes of the SONIA Stakeholder Advisory Group - 20 October 2021

Minutes

1. Welcome/introductions

Members welcomed Alexandra Innes, who had recently commenced her term as an external member of the SONIA Oversight Committee and was attending her first meeting of the SONIA Stakeholder Advisory Group.

2. Review of market conditions

The Bank presented a pack of publically available statistics on the SONIA rate and volumes, and on SONIA adoption since January 2019.^{footnote [1]}

The Group noted that SONIA adoption continued to progress well, with new SONIA issuance continuing this year and the transition plan well in hand despite the continuation of synthetic LIBOR. The SONIA rate had remained very stable compared to overnight repo rates, especially during periods of market volatility. The Group noted that two current areas of interest were around rate expectations and a potential Central Bank Digital Currency (CBDC). The latter remained a wider, longer term horizon scanning piece.

The Group discussed rate expectations. It noted that early-morning MPC announcements during the Covid crisis had been helpful, as they had contributed to more fluidity in the market. Midday MPC announcements had tended to lead to two trading sessions during in the day – pre-announcement and post-announcement. Announcing the rate earlier in the day enabled a smoother transition and larger consistency within the market. Additionally, the Group noted there were quite a lot of short-term maturities at the present time because investors were waiting to see if there would be a rate change in November. This wait-and-see approach could potentially lead to challenges for firms looking to place excess liquidity in December. There was also increased focus on excess liquidity at present due to the increase in TFSME drawdowns before the scheme closed at the end of October.

3. Update from the Bank’s risk-free rate (RFR) transition team

Significant progress had been made in sterling market transition since the previous meeting, with a number of key milestones recommended by the Working Group on Sterling Risk Free Reference Rates (RFRWG) having passed. In particular, end-March saw the end of the initiation of new sterling LIBOR linked loans, bonds, securitisations and linear derivatives^{footnote [2]} that would expire after the end of 2021. New trading in non-linear derivative markets had followed by the end of Q2. These milestones had been successful in driving down new use of GBP LIBOR, with the vast majority of new business across the full range of sterling markets now based on alternative reference rates such as SONIA.

For example, around 80% of monthly volumes in cleared sterling swaps were now based on SONIA, and the value of SONIA-linked swaps outstanding at LCH now exceeded LIBOR-linked swaps. The share of SONIA in sterling futures was also gradually increasing, with a very steady uptick in open interest since June 2021. In cash markets, SONIA bonds now formed a significant majority of the outstanding stock of floating rate notes, and SONIA had been commonly used in lending products since the end of new LIBOR-linked lending at end-Q1.

Looking ahead, market participants would need to be fully prepared for the end of GBP LIBOR at end-Q4 2021. Focus remained particularly on continued active transition of legacy contracts, CCP conversions of cleared derivatives in December, and the implementation of ISDA fallbacks at year-end. Collectively these would lead to a material further increase in exposures to SONIA, including potentially up to £15 trillion of additional cleared swaps and futures.

4. Review of SSAG Terms of Reference

The Group was asked for comments and challenges on the SSAG Terms of Reference (ToRs), to ensure that the Group is maintaining relevance in discussion topics and contributing effectively to the SONIA Oversight Committee. The Group was content with the ToRs in their current form. However, it was noted that SSAG sometimes covered items not specifically referenced in the ToRs, most notably in its discussions on the adoption of SONIA across different markets. The Group believe that these discussions were useful, but agreed that a steer from the SONIA Oversight Committee on whether and to what extent SSAG should continue to cover these wider issues would be useful.

5. Making SSAG more diverse and inclusive

The Bank gave an update on wider initiatives to improve diversity and inclusivity both internally and on external committees and groups, and asked SSAG to consider how this group might also be made more diverse and inclusive.

The Group discussed a number of ways to increase the level of diversity and inclusivity at SSAG meetings. Suggestions included: having diversity and inclusion as an ongoing SSAG agenda item; including additional wording on D&I within the SSAG ToRs; and inviting more diverse speakers and junior observers from member organisations to participate in the SSAG meetings. The Group agreed that junior staff, who are trading with SONIA day-to-day, would benefit from attending the SSAG meetings to learn more about the wider agenda and to demystify the work of committees and the Bank.

6. Review of published policy documentation

The Group was content with the current drafting of Sections 5 and 6 of the SONIA key features and policies, ahead of their review at the November SONIA Oversight Committee. Section 5 covered the short-term contingency arrangements for SONIA, and Section 6 covered policies for handling data errors.

7. Future discussion topics / AOB

The Group were asked if there were any future topics which would be useful to discuss. No additional topics were raised at this point in time.

The Group were reminded that the Bank would continue to work in a more hybrid manner moving forward. So both physical and remote attendance would be welcomed at future meetings, circumstances permitting.

Attendees

Chair - Scott McMunn (Independent member of SONIA Oversight Committee)

External Member - Alexandra Innes (Independent member of SONIA Oversight Committee)

HSBC - James Murphy

Insight Investment - Robert Gall

ICE Futures - Matthew Horton

ISDA - Jonathan Martin

JP Morgan AM - Olivia Maguire

LCH - Philip Whitehurst

LGIM -John Wherton

Mizuho - Robert Thurlow

NatWest - Donal Quaid

Goldman Sachs - Nikhil Choraria

RBC Capital Markets - Sean Taor

Société Generalé - Roman Sinclair

TP ICAP - Philip Chilvers

Bank of England - Stuart Brooker, Joanna McLafferty, Sienna Holcombe, Tom Horn

Apologies

CurveGlobal - Ian Murphy

Bank of England - Rhys Phillips, Jon Pyzer, Kirstine McMillan

Published SONIA statistics

Chart 1: SONIA volumes

Chart 2: SONIA rates and percentiles – spread to Bank Rate

Usage of SONIA

Chart 3: SONIA Futures – monthly nominal volumes and open interest at month end*

Chart 4: Volume distribution of FRN issuances

Chart 5: LCH Swaps Monthly Share of SONIA to LIBOR cleared swaps