What is SONIA? A Guide to the Sterling Overnight Index Average

SONIA (Sterling Overnight Index Average) is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market. It is used as a benchmark rate in sterling markets and is administered by the Bank of England.

How is SONIA Calculated?

SONIA is calculated by the Bank of England through a systematic process that ensures accuracy and reliability:

• Data Collection: The Bank of England gathers data on overnight, unsecured lending transactions from active participants in the Sterling wholesale market.
• Eligibility of Transactions: Only transactions meeting specific thresholds and criteria, including a minimum value, are included in the SONIA calculation.
• Volume-Weighted Mean: SONIA is a volume-weighted mean, meaning larger transactions carry more weight in the final rate.
• Trimmed Mean Method: The Bank of England excludes the top and bottom 25% of transactions to remove the effects of extreme rates.
• Daily Publication: SONIA is published each business day at 9 a.m. (UK time), reflecting activity from the previous business day.

Why Did SONIA Replace LIBOR?

LIBOR (London Interbank Offered Rate) was the previous benchmark, but it was based on estimates rather than actual transactions. After the LIBOR manipulation scandal in 2012, regulators pushed for transaction-based benchmarks. SONIA, being based on actual overnight lending transactions worth billions of pounds daily, provides a more robust and reliable reference rate.

Who Uses SONIA?

SONIA is used across the financial industry:

• Derivatives markets — Interest rate swaps, futures, and options reference SONIA
• Loan markets — Floating-rate corporate and retail loans increasingly use compounded SONIA
• Bond markets — Sterling floating-rate notes (FRNs) use SONIA as the reference rate
• Mortgage markets — Some UK mortgage products are now linked to SONIA

Compounded SONIA

For periods longer than overnight, SONIA is typically compounded in arrears. This means the rate for a given period is calculated by compounding each daily SONIA rate over the observation period. Our calculator makes it easy to compute compounded SONIA for any date range.