It's official: The Bank of England will start setting the Libor replacement Sonia next April

Lucy White
Sonia is designed to be less prone to abuse (Source: Getty)

The Bank of England has today announced that it will start setting the Sonia rate, a replacement for Libor, on 23 April 2018.

The reformed Sonia, which stands for the Sterling Overnight Index Average, will see the central bank take on the end-to-end administration of the inter-bank lending rate, including the calculation and publication.

This is as opposed to Libor, which was set by major banks themselves under the auspices of the British Bankers' Association. They reported the cost of borrowing between banks, but the way it was reported with few transactions to rely on meant it was open to illegal manipulation.

Read more: Libor explained: How a little known benchmark rate rocked the City of London

A group of banks including Goldman Sachs, Barclays and Deutsche Bank, collaborating in the Sterling Risk-Free Rate Working Group, agreed earlier this year that Sonia would be the best alternative for Libor in sterling derivatives and other financial contracts.

Chris Salmon, Bank of England executive director for markets, said at the time that the adoption of Sonia would “minimise opportunities for misconduct”.

Read more: Libor will end in 2021 says Britain's top financial regulator

Sonia, which has been running in its current form since 1997, tracks the funding rates of actual overnight transactions. The new Sonia will include transactions arranged between parties, as well as those concluded through brokers.

Unlike the Libor rate, Sonia will use data from the Bank of England’s Sterling Money Market Data Collection, rather than relying on submitters.

Read more: The likely replacement for Libor may be just as prone to abuse

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