The Bank of England has today published a consultation document setting out in detail plans first announced in March 2015 for a new sterling money market data collection. The consultation also sets out, at a high level, how the Bank plans to use these data to reform the Sterling Overnight Index Average (SONIA) benchmark interest rate.
The Bank is undertaking the new data collection to secure and improve the information available to it on conditions in sterling money markets, which is an important input to the decisions of the Monetary Policy Committee and Financial Policy Committee. The Bank intends to collect transaction-level data from banks, building societies and major investment firms on their secured and unsecured sterling money market borrowing activity. This will provide the Bank with a better understanding of developments in short-term interest rates, benefiting the Bank's analysis of both monetary and financial conditions. It will also provide a richer picture of activity in the sterling money market, enabling the Bank to better assess overall market effectiveness.
The consultation first sets out the Bank's proposed approach to this new sterling money market data collection and seeks feedback from market participants in order to ensure that the required information is collected in the most effective and cost-efficient way. This part of the consultation is targeted primarily at the institutions from which the Bank plans to collect data.
The consultation then sets out, at a high level, the Bank's plans to reform SONIA, a key overnight unsecured interest rate benchmark. These plans are likely to be of interest to users of SONIA, including participants in the sterling Overnight Indexed Swap (OIS) market.
The Bank views reform of SONIA as desirable given its role as a critical benchmark in sterling markets, and in view of the limited size of the market for brokered deposits on which SONIA is currently based. The new sterling money market data collection will provide an opportunity to strengthen SONIA by broadening the range of transactions underpinning the benchmark. The Bank and the Wholesale Market Brokers' Association (WMBA) – which currently administers SONIA – are therefore working towards the Bank taking over as administrator of SONIA in early 2016 so that, in due course, SONIA can be transitioned to a new broader basis.
The Bank anticipates that it will be in a position to consult on detailed plans for the reform of SONIA in Q2 2016.