As a new era for reference rates dawns, industry is making the shift to alternatives, with implications across the finance landscape.

As the incumbent benchmark, the London Interbank Offered Rate (LIBOR) effectively underpins hundreds of trillions globally in financial products. Now, regulators are urging the adoption of new benchmarks, ahead of reforms which will see LIBOR wound down by the end of 2021.

Enter “alternative reference rates”…

What is a reference rate?

A reference rate is a benchmark interest rate used to determine other interest rates. For example, LIBOR provides an indication of the average rates at which LIBOR panel banks could obtain wholesale, unsecured funding for set periods in particular currencies. Lenders then use this rate to determine interest rates for a variety debt instruments - such as mortgages and commercial loans - and financial products like derivatives.

The need for benchmarks to be based on transparent, arms-length transactions has been reinforced by global regulators, including The Financial Stability Board and the International Organization of Securities Commissions.

In response, industry has started to utilize a raft of alternative reference rates, and from the AONIA (Australian Interbank Overnight Cash Rate) to SARON (Swiss Average Rate Overnight) strategies are in place to embrace new benchmarks.

Already, Morgan Stanley, Wells Fargo, JP Morgan, Citigroup and Goldman Sachs have all referenced SOFR in bond transactions.

The U.K. - SONIA

The Sterling Overnight Interbank Average (SONIA) has been chosen by the Working Group on Sterling Risk-Free Reference Rates as the U.K.’s preferred alternative reference rate.

As a transaction-based benchmark, SONIA reflects the average interest rates that banks pay to transact sterling overnight from other financial institutions.

SONIA has been a benchmark since 1997. The Bank of England became its administrator in 2016, and later implemented reforms to strengthen its methodology. This involved broadening SONIA’s scope of overnight unsecured deposits to help bolster underlying transaction volumes, which now average around £42 billion daily.

Adoption is underway. Last year, the European Investment Bank issued a £1 billion 5-year SONIA linked floating rate note. Both Santander U.K. and Lloyds Bank each issued their second SONIA-linked covered bond earlier this year, while the U.K.’s biggest port operator - Associated British Ports - became the first company to switch an existing issue from LIBOR to SONIA in June 2019.

U.K. bank NatWest also plans to offer the first SONIA-referenced alternative to a LIBOR loan, which will be piloted with a limited number of large customers ahead of expected launch in the second half of 2019.

ICE is the market leader in alternative reference rates, with volume traded in its SONIA futures exceeding £3.5 trillion notional. SONIA futures trade alongside our existing interest rate futures and options, along with inter-contract spreads. ICE’s interest rates derivatives clear through ICE Clear Europe, enabling up to 80% margin offsets depending on expiries/currencies.

SONIA & SOFR — Key Features: *Overnight rates* Transaction-based

The U.S. - SOFR

In North America, the Secured Overnight Financing Rate (SOFR) has been recommended by the Alternative Reference Rates Committee (ARRC) as a benchmark replacement.

SOFR is an overnight reference rate that broadly measures the cost of borrowing cash with U.S. Treasuries as collateral.

Following SOFR’s introduction by the Federal Reserve Bank of New York in 2018, use of the index has grown steadily with over $USD11 trillion in cumulative trading of futures, $USD100 billion of Swaps and overall issuance tied to SOFR past $USD136 billion.

Already, banks including Morgan Stanley, Wells Fargo, JP Morgan, Citigroup and Goldman Sachs have all referenced SOFR in their bond transactions.

The SOFR rate is published daily by the New York Fed based on data collected on over $USD800 billion in secured overnight repurchase transactions. These represent the largest underlying volumes of any U.S. money market, underscoring SOFR’s stability.

The ARCC has said it will support the publication of a forward-looking SOFR term rates with a transparent calculation methodology, as SOFR’s liquidity grows.

ICE Futures Europe offers One Month and Three Month SOFR futures, with open interest continuing to build.


"ICE is a leading exchange in Benchmark Reform listed products, offering 1M and 3M futures in both USD and GBP alternative reference rates. Futures play a fundamental role in price discovery and term structure in interest rate curves. The ICE Exchange offers economically efficient and transparent access to trade and hedge the new reference rates." Matthew Horton - ICE Director, Head of Interest Rate Derivatives

1M SOFR

Notional: $10,000 * Rate Index
Min Price Fluctuation: 1/4 basis point (0.00250 or $25)
ICE Commodity: SF1
Bloomberg: SRDA Comdty
Reuters: 0#SOFR:
TT, Fidessa and FIS Code: SF1

3M SOFR

Notional: $10,000 * Rate Index
Min Price Fluctuation: 1/4 basis point (0.00250 or $25)
ICE Commodity: SF3
Bloomberg: SRLA Comdty
Reuters: 0#SOFR3:
TT, Fidessa and FIS Code: SF3

1M SONIA

Contract Notional: £2,500 * Rate Index
Min Price Fluctuation: Front Quarterly: ¼ basis point (0.0025 or £6.25)
All other months: 1/2 basis point (0.005 or £12.50)
Bloomberg: SOOA
Comdty Reuters: 0#SON:KS
ICE Commodity: SOA

3M SONIA

Contract Notional: £2,500 * Rate Index
Min Price Fluctuation: Front Quarterly: ¼ basis point (0.0025 or £6.25)
All other months: 1/2 basis point (0.005 or £12.50)
Bloomberg: SFIA
Comdty Reuters: 0#SON3:
ICE Commodity: S03

ICE RFR Futures

Currency United Kingdom United States
RFR SONIA SOFR
Index Availability Launched in 1997 by the WMBA, BOE took on administration April 2016 FRBNY began publishing April 2018
RFR Administration Bank of England Federal Reserve Bank of New York
Secured or Unsecured Unsecured Rate Secured Rate
Regulatory Body Bank of England (BOE) Federeal Reserve (Fed)