LIBOR was a forward-looking term bank-funding benchmark; SONIA is an active transaction-based overnight sterling rate commonly compounded in arrears.
LIBOR and SONIA are economically different sterling benchmarks. Sterling LIBOR was a forward-looking unsecured term bank-funding rate based on panel submissions. SONIA is an active transaction-based measure of overnight unsecured sterling borrowing, administered by the Bank of England and commonly compounded over the interest period.
All sterling LIBOR settings have ceased. SONIA is now embedded in sterling bond, loan, and derivatives markets, while limited cash-market uses may employ a separately administered forward-looking term SONIA rate.
| Feature | Sterling LIBOR | SONIA |
|---|---|---|
| Status | All settings ceased | Active |
| Primary maturity | Historical overnight and term settings | Overnight |
| Economic measure | Unsecured term bank-funding estimate | Unsecured overnight sterling wholesale borrowing |
| Main input | Panel-bank submissions under the historical methodology | Eligible transaction data reported to the Bank of England |
| Calculation | Historical trimmed arithmetic mean | Volume-weighted trimmed mean |
| Rate timing for a three-month period | Usually known near period start | Compounded-in-arrears rate known near period end |
| Credit and liquidity content | Included term bank-credit and liquidity components | Limited by overnight maturity and broader wholesale coverage |
| Common modern use | Historical and legacy records | Sterling loans, bonds, derivatives, and valuation |
Three-month LIBOR supplied one three-month fixing near the start of the period. A borrower could usually know the benchmark component before most interest accrued.
SONIA is published for each London business day after the underlying overnight transactions occur. A three-month compounded SONIA rate accumulates those daily observations and becomes final only near the end of the period.
Cash products can use a lookback or payment delay so the calculation is available before payment is due. That operational solution creates a convention that must be documented precisely.
For daily SONIA observation r_i, applicable calendar days d_i, and day-count denominator D, a simplified compounded return is:
The contract determines how that return is annualized and combined with the margin. It also determines which daily observation applies across weekends and holidays.
A one-day SONIA fixing should not be used as though it were a three-month term rate.
Assume a GBP 5 million loan historically paid three-month sterling LIBOR plus a 1.50% margin. For one 92-day period, suppose the old benchmark would have been 4.90%.
The historical all-in rate would be:
Now assume an amendment instead requires compounded SONIA of 4.65%, an illustrative 0.25% transition adjustment, and the unchanged 1.50% margin:
Using Actual/365, illustrative interest is:
The matching result is deliberately constructed to explain the components. The 0.25% adjustment is not a universal sterling fallback spread, and actual LIBOR and SONIA values would not be expected to match this neatly. The contract controls the benchmark, fixed adjustment, margin, dates, and calculation.
LIBOR and SONIA do not measure the same risks. Historical sterling LIBOR included a term bank-credit and liquidity premium. Overnight SONIA generally contains less of those components.
A fixed credit adjustment spread can reduce value transfer when a legacy contract moves from LIBOR to SONIA. It does not compensate for every difference, including:
The original contractual margin should not be confused with the transition adjustment. Adding or removing either component changes the all-in rate.
| Feature | Compounded SONIA in arrears | Term SONIA reference rate |
|---|---|---|
| Input | Daily realized SONIA observations | Forward-looking SONIA derivatives data under an administrator methodology |
| When known | Near period end | Near period start |
| Market role | Standard in sterling derivatives, bonds, and many loans | Limited cash-market use cases |
| Main benefit | Direct anchoring in realized overnight benchmark | Advance payment visibility |
| Main limitation | Operational complexity and late rate finalization | Separate benchmark, governance, licensing, and permitted-use considerations |
The two are not interchangeable simply because both names contain SONIA.
A borrower can have a SONIA-linked loan and a SONIA-linked interest-rate swap but still face mismatched cash flows. Differences can arise from:
A treasury review should compare complete definitions, not only benchmark labels.
This article provides general financial education, not personalized borrowing, investment, accounting, or legal advice. Use the governing contract and current Bank of England or FCA materials for an operational transition or calculation.