Date: 23 February 2022
Minutes
1. Welcome / introductions
2. Retrospective review of market conditions
The Bank presented a pack of publically available statistics on the SONIA rate and volumes, and on SONIA adoption since April 2020.footnote [1]
The Group noted that SONIA volumes had been high in the run-up to the November MPC announcement in anticipation of a possible rate change. Following the MPC’s decision to leave Bank Rate unchanged in November, the market’s focus shifted to year end.
The December MPC announcement of a 25bps Bank Rate (BR) increase was not widely anticipated, as demonstrated by the relatively significant widening of the SONIABR wedge on the day of the announcement. Members did not believe the one-day widening of the wedge had caused any issues, but noted again that announcing and implementing a BR change from midday can result in some market bifurcation. This bifurcation could be slightly more challenging in the event of a larger (e.g. 50bps) BR increase.
Although it was not widely anticipated, members noted that the December BR increase ultimately removed some near-term uncertainty in the run up to year-end, which helped to ease conditions for issuers and investors.
Members concluded that the end-of-year LIBOR transition had gone well and the market remained orderly throughout the process. The derivatives contract migration which took place on 17 December had proceeded smoothly with all options and futures contracts transitioning to SONIA.
Although the transition had been smooth, members suggested that there may have been a reduction in liquidity in the SONIA futures market, compared to the short sterling futures market. However, the Bank’s Risk Free Rates team noted that this reduction in liquidity was seen across global markets in Q4 and wasn’t believed to be specifically due to LIBOR transition. Furthermore, daily volume analysis showed similar levels of trading volumes between SONIA futures in 2022 and short sterling futures in previous years. Reduced liquidity may have been a result of participants exiting the market, who may have been discouraged by a reduction in volatility due to a lack of credit spread.
Overall, members noted that the stability of the SONIA-BR wedge was a real strength of the SONIA Benchmark rate, particularly in times of heightened uncertainty.
3. Horizon scanning – SONIA and money markets
Members considered whether further increases in BR might lead to changes in the structure of the market which underpins the SONIA benchmark. It was agreed that there was unlikely to be any significant changes, although there was the potential for a small widening of the SONIA-BR wedge if rising interest rates increased banks’ margins and revenues more generally – which might also cause banks to seek to increase margins on SONIA eligible lending. However, it was noted that the SONIA-BR wedge was likely to remain relatively stable as reserves are ultimately compensated at Bank Rate – which would limit the extent of any possible divergence of SONIA from BR.
4. Update from the Bank’s risk-free rate (RFR) transition team
In accordance with the FCA’s March 2021 statements, publication of Sterling, Japanese Yen, Swiss Franc, and Euro panel-bank LIBOR settings ended permanently on 31 December 2021 as planned. Six of the most widely used sterling and yen LIBOR settings continue to be published on a ‘synthetic’ basis, for a time-limited basis, under a changed methodology, for legacy use only. Progress in broad SOFR adoption has accelerated following the prohibition on new use at the start of 2022 and is expected to continue ahead of the end-June 2023 cessation.
Sterling LIBOR transition has demonstrated strong cooperation between authorities and industry participants as exemplified by the Sterling Risk-Free Rate Working Group and is recognised as a success and a template for other jurisdictions to follow. Strong cooperation has meant less intervention via rules and capital charges and has supported firms’ move to SONIA.
5. Future discussion topics / AOB
No additional discussion topics were raised.
Attendees
Chair: Scott McMunn (Independent member of SONIA Oversight Committee)
External Member: Alexandra Innes (Independent member of SONIA Oversight Committee)
HSBC: James Murphy
ICE Futures: Matthew Horton
ISDA: Jonathan Martin
JP Morgan AM: Olivia Maguire; Mohamed Abubakar
LCH: Philip Whitehurst
LGIM: John Wherton
Mizuho: Robert Thurlow
NatWest: Donal Quaid
Société Générale: Romain Sinclair
Bank of England: Arif Merali; Stuart Brooker, Joanna McLafferty, Kirstine McMillan; Sienna Holcombe
Apologies
Goldman Sachs: Nikhil Choraria
Insight Investment: Robert Gall
Appended to these minutes
Appendix