Date: 26 October 2022
Minutes
1: Welcome / introductions
2: Retrospective review of market conditions
The Bank presented a pack of publically available statistics on the SONIA rate and volumes, and on SONIA adoption since September 2020.footnote [1]
Volumes in the overnight unsecured deposit market had increased to record highs in October 2022, which was related to market turbulence as funds increased liquidity. Members noted that the current high levels of liquidity could place additional challenges around remaining fully invested as year-end approaches.
The Group noted the stability of the wedge between SONIA and Bank Rate (BR) notwithstanding recent market conditions and increases in volumes. Members highlighted the importance of the stability of the SONIA rate, particularly in times of heightened market uncertainty.
The Group discussed changes in volumes around MPC announcements as the market sought short tenors ahead of anticipated rate rises.
3: Horizon scanning – SONIA and money markets
The Group had no concerns for how SONIA is functioning, commenting that the general market was robust.
Current volumes in the SONIA market remain high, but could reduce going forwards as or when funds return to investing in longer dated assets. However, members noted the possibility that funds may seek to maintain larger cash buffers given general levels of uncertainty, which would cause the scale of funds invested in SONIA and the overnight repo market to remain high.
This could result in higher demand for overnight maturities in sterling markets than has previously been seen prior to year-end. Members suggested that regulatory pressure across jurisdictions may impact SONIA volumes at year end however it was noted that several factors can influence year-end volumes.
4: The evolving uses of SONIA
The Group noted that Quantitative Tightening (QT), to be commenced by the Bank in October 2022, could impact SONIA volumes which would be something to monitor going forwards. Potential impact on the wedge, however, was expected to be muted as reserves are ultimately compensated at BR, which would limit the extent of any possible divergence of SONIA from BR.
The Group discussed challenges around the limited secondary market for SONIA CDs, and suggested that standardisation of floating rate SONIA CDs could be beneficial.
5: Update from the Bank’s risk-free rate (RFR) transition team
The sterling transition to SONIA was largely completed at the end of 2021. SONIA is now fully embedded in derivative, loan and bond markets. Legacy usage of synthetic LIBOR is small, with less than 1% of the original population, and the Bank and the FCA working with firms through supervisory channels to ensure these deadlines are met.
Synthetic sterling LIBOR is still available at 1-month, 3-month and 6-month tenors for legacy contracts but not for new business. The FCA announced the cessation of 1-month and 6-month synthetic LIBOR for end-March 2023. They will provide an update later this year with plans for ceasing 3-month synthetic LIBOR.
6: Review of SSAG Terms of Reference
The group’s chair, Scott McMunn, provided an update on his review of membership, indicating that he may look to widen attendance to ensure the group continued to provide a broad and balanced composition of relevant stakeholders. The Group was reminded of the importance of diversity in attendance, and was encouraged to bring staff that are culturally diverse, as well as from different roles in their organisation. This has been reflected within the Group’s Terms of Reference.
7: Future discussion topics / AOB
No additional discussion topics were raised.
Attendees
Chair: Scott McMunn (Independent member of SONIA Oversight Committee)
External Member: Alexandra Innes (Independent member of SONIA Oversight Committee)
ICE Futures: Caterina Caramaschi; Uriel Amitai
Insight Investments: Robert Gall
ISDA: Jonathan Martin
JP Morgan AM: Joe McConnell
LCH: Philip Whitehurst
LGIM: John Wherton
Mizuho: Dominic Duncan
NatWest: Donal Quaid
RBC Capital Markets: Sean Taor
Société Générale: Romain Sinclair
TP ICAP: Philip Chilvers
Bank of England: Arif Merali; Ashley Young, Joanna McLafferty, Kirstine McMillan; Sienna Holcombe
Apologies
Goldman Sachs: Nikhil Choraria
HSBC: James Murphy
Appended to these minutes.
Appendix