SONIA is the Bank of England's transaction-based sterling overnight benchmark, used through daily rates, compounded averages, and the SONIA Compounded Index.
SONIA, the Sterling Overnight Index Average, is the Bank of England’s benchmark for the rate paid on eligible unsecured overnight sterling deposits in wholesale markets. It is a transaction-based overnight rate used in sterling derivatives, floating-rate debt, loans, and valuation.
SONIA is not a forward-looking term bank-lending quote. A multi-day contract usually applies daily SONIA observations through compounding or another specified averaging convention.
The Bank of England defines SONIA’s underlying interest as the rate paid on sterling short-term wholesale funds where credit, liquidity, and other risks are minimal.
Eligible transactions are:
The benchmark covers eligible transactions negotiated bilaterally as well as through brokers. It therefore reflects a broader wholesale deposit market than the pre-2018 methodology.
The Bank sorts eligible transactions by rate and calculates a volume-weighted trimmed mean using the central 50% of the volume distribution. In practical terms, the lowest 25% and highest 25% of transaction volume are excluded before the weighted mean is calculated.
A simplified weighted-average expression for the retained transactions is:
where (r_i) is a retained transaction’s rate and (V_i) is its volume. The official methodology governs transactions that cross trimming boundaries, rounding, validation, and contingency treatment.
SONIA is rounded to four decimal places. The Bank also publishes aggregate volume and selected volume percentiles to provide context for the daily determination.
Banks submit prior-day money-market data to the Bank of England, which validates the data before publication. SONIA for a given London business day is published at 9:00 a.m. on the following London business day.
The Bank maintains a contingency methodology for short-term disruptions or insufficient data. Under the published backstop, SONIA can be derived from Bank Rate plus a recent average SONIA-to-Bank-Rate spread, excluding the highest and lowest spread days. Use of the contingency method is identified in the data.
This matters operationally: a calculated rate and a contingency rate come from different evidence, even though both are official SONIA determinations.
A single SONIA fixing covers an overnight period. Contracts lasting weeks or months commonly compound daily rates.
For daily rate (r_i), applicable calendar days (d_i), and day-count denominator (D), a simplified compounded period return is:
Friday’s rate may apply for several calendar days when the next London business day is Monday. Contract terms specify holiday treatment, observation shift, lookback, rounding, and when the rate becomes payable.
The Bank of England also publishes the SONIA Compounded Index, which can simplify calculation between two index dates:
An index ratio is valid only when the contract permits that method and the selected dates match its observation convention.
Suppose an £8 million loan uses compounded SONIA plus a 150-basis-point margin. The compounded SONIA annualized for the contract’s 92-day period is 4.80%, and the agreement uses Actual/365.
The annualized all-in rate is:
Illustrative interest is:
This simplified example assumes the compounded benchmark has already been calculated. A real payment depends on the daily observation series, non-business-day weighting, rate floor, rounding, and exact accrual dates.
| Feature | SONIA | Sterling LIBOR |
|---|---|---|
| Status | Active | All settings ceased |
| Tenor | Overnight | Historical term settings |
| Input | Eligible unsecured overnight deposit transactions | Panel-bank unsecured term funding submissions |
| Administrator | Bank of England | Historical LIBOR administrator |
| Credit content | Limited by overnight maturity | Included term bank-credit and liquidity components |
| Period rate | Commonly compounded from daily observations | Usually known near the period start |
Transitioning a contract from LIBOR to SONIA can require a spread adjustment because the benchmarks do not represent identical economic risks. It can also change payment-notice timing and systems.
SONIA is a market benchmark; Bank Rate is the Bank of England’s monetary-policy rate. Policy decisions strongly influence overnight sterling conditions, but the two rates are not the same.
SONIA can trade above or below Bank Rate because of market liquidity, balance-sheet conditions, and the composition of eligible transactions. A contract referencing SONIA should not substitute Bank Rate unless its fallback explicitly says to do so.
Confirm:
This article provides general financial education, not personalized investment, borrowing, accounting, tax, or legal advice. Use the governing contract and current Bank of England publications for operational calculations.