€STR and SONIA

When a sterling or euro contract calculates interest from an overnight rate, what the rate is based on and when it is published matter both for reading the contract terms and for loading daily values.

What €STR and SONIA measure

€STR (euro short-term rate) and SONIA (Sterling Overnight Index Average) are both benchmark rates built from the rates on unsecured borrowing that runs until the next day. Because the borrowing lasts only one day, they are called overnight rates.

€STR reflects the wholesale cost for euro area banks of borrowing euro overnight without collateral, in the large-value market between financial institutions and similar counterparties¹. SONIA measures the rate paid on short-term wholesale sterling funds in conditions where credit risk and liquidity risk are minimal².

The administrator that calculates and publishes €STR is the European Central Bank (ECB)³, and for SONIA it is the Bank of England⁴. In both cases, the central bank runs the rate itself.

The main differences among benchmark rates, including TONA and SOFR (currency, whether collateral is used, and administrator), are summarized in a table in What Is a Benchmark Rate?

Transactions used in the calculation

Both €STR and SONIA are calculated from transaction data that banks and other institutions report to the central bank every day. The reporting arrangements and the conditions for eligible transactions are as follows.

€STR uses only transactions in which a bank is the borrower. The lenders are not limited to other banks and include financial counterparties in general⁵. SONIA likewise reflects the average rate at which banks borrow overnight sterling from other financial institutions and institutional investors⁷.

SONIA's current scope was set by the reform in April 2018⁸.

How the volume-weighted trimmed mean is calculated

€STR and SONIA are calculated as a volume-weighted trimmed mean. Transactions are ordered from the lowest rate to the highest, the bottom 25% and the top 25% by volume are removed, and the rates on the remaining central 50% are averaged with volume weights⁵⁶.

Consider a hypothetical example in which five transactions take place. The total volume is 100 billion euros, so 25 billion euros is removed from the bottom and 25 billion euros from the top.

The bottom 25 billion euros consists of all 10 billion euros of the first transaction and 15 billion euros of the second. The top 25 billion euros consists of all 15 billion euros of the fifth transaction and 10 billion euros of the fourth. When a transaction straddles a trimming threshold, as the second and fourth transactions do, only the volume inside the threshold is kept. For €STR, the volumes spanning the thresholds are split pro rata so that exactly 50% of the total volume remains after trimming⁵.

The rates on the remaining 50 billion euros are then averaged with volume weights.

$$\frac{1.85 \times 5 + 1.88 \times 30 + 1.90 \times 15}{50} = \frac{94.15}{50} = 1.883$$

The result in this example is 1.883%. A volume-weighted mean of all five transactions gives 1.8815%, which differs from the trimmed mean.

The trimmed mean does not change when the rate on a transaction at either end moves only within the removed range. In this example, if the rate on the fifth transaction changed from 1.95% to 3.00%, the same transactions would still be removed, and the result would stay at 1.883%. A weighted mean of all transactions would rise from 1.8815% to 2.039% for the same change.

€STR is published to three decimal places⁵, and SONIA to four decimal places⁶. The US dollar rate SOFR also uses volumes, but it is calculated as a median rather than a trimmed mean.

Publication time and calculation days

For both €STR and SONIA, the rate for the transactions on one business day is published on the morning of the next business day.

TARGET2 was a large-value payment system operated by the euro area central banks. It was replaced by its successor, T2, in March 2023¹³. €STR is calculated on TARGET2 business days.

For SONIA, reporting banks send their data on the previous business day's transactions by 7:00 a.m⁷., the Bank of England checks it¹⁴, and SONIA is published at 9:00 a.m. Figure 1 shows the sequence.

Figure description

This figure shows the SONIA calculation day in time order. Reporting banks send the previous business day's transaction data, the Bank of England checks it and queries transactions that look wrong, and then SONIA is published. Publication is the milestone. After publication the value is corrected only when an error changes it by a large amount, and the correction has a deadline. The times are the same as in the table above.

A weekend shows how the transaction day and the publication day can differ. For example, SONIA calculated from Friday's transactions is published on the morning of the next business day, Monday, if Saturday and Sunday are not business days. €STR is likewise published on the business day after the transaction day.

On days without enough data, SONIA and €STR are both calculated with a contingency method set in advance.

Deep diveHow the rates are calculated on days without enough data

€STR switches to its contingency method when fewer than 20 banks report, or when the five largest banks account for 75% or more of total volume. The rate is then a volume-weighted average of the rate from that day's limited transactions and the previous business day's rate. If the ECB's key interest rates change on that day, the previous business day's rate is adjusted for the change before it is used¹⁵.

SONIA uses its contingency method in cases such as when five or more reporters have failed to submit valid data and the eligible volume is below 70% of the average over the previous five business days. In that case, the Bank of England averages the spread between SONIA and its policy rate (Bank Rate) over the previous five publication days. The days with the highest and lowest spreads are excluded. SONIA is set at that day's Bank Rate plus this average¹⁶.

Compounded averages and indexes

€STR and SONIA are daily rates. SONIA, for example, is used in swap transactions and to calculate interest on sterling floating rate bonds (floating rate notes)⁷. Calculating the rate for an interest period from daily rates is covered in Compounding in Arrears.

The Bank of England has published the SONIA Compounded Index since August 3, 2020, to make it simpler to calculate rates that build up daily rates with compound interest¹⁷. The index is set at 100.00000000 for April 23, 2018, the date of the SONIA reform, and compounds SONIA from then on. The index for a business day is published at 9:00 a.m. on that day. The compounded SONIA rate for a period can be derived from the index values on its start and end dates¹⁸.

Since April 15, 2021, the ECB has published compounded average rates of €STR and a compounded index. The average rates are published for a set of fixed periods¹⁹.

History and role as a replacement rate

SONIA began in March 1997, and the Bank of England took over its administration in 2016⁷. The Bank of England consulted on reforming SONIA in July 2015, October 2016 and February 2017⁸. The Working Group on Sterling Risk-Free Reference Rates considered replacements for sterling LIBOR. In April 2017, it recommended the reformed SONIA as the sterling risk-free rate (RFR)²⁰.

The Bank of England reformed SONIA on April 23, 2018. Until then, SONIA had covered only transactions arranged through brokers. The reform added transactions negotiated directly between the counterparties and changed the averaging method to a volume-weighted trimmed mean⁸.

The ECB decided in September 2017 to develop €STR²¹. The ECB, the European Securities and Markets Authority (ESMA), the European Commission and the Belgian Financial Services and Markets Authority set up a private sector group, the working group on euro risk-free rates. It recommended €STR as the euro area RFR on September 13, 2018. The ECB published the first €STR on October 2, 2019, reflecting transactions from October 1²².

EONIA (euro overnight index average), previously the euro overnight benchmark rate, was replaced by €STR. The European Money Markets Institute (EMMI), which administered EONIA, changed EONIA's methodology to "€STR plus 8.5bp" from October 2, 2019, when €STR publication began. This gave market participants time to move to €STR, and EONIA ended on January 3, 2022²³.

The euro also has another benchmark rate, EURIBOR (euro interbank offered rate). On May 11, 2021, the euro area working group recommended that contracts use €STR-based rates as fallbacks (replacement rates) in case EURIBOR permanently stops being published²².

For sterling and euro LIBOR, the panel bank submissions used to calculate the rates ended at the end of 2021. Some sterling tenors continued to be published until March 2024 as synthetic LIBOR, calculated with a changed methodology for existing contracts²⁴. The UK Financial Conduct Authority (FCA) lists sterling SONIA and euro €STR among the RFRs that replace LIBOR²⁵.

Notes

1. European Central Bank, "The euro short-term rate (€STR) methodology and policies" (March 2021), 3.1 "Statement of underlying interest". ↩ ↩²

2. Bank of England, "SONIA key features and policies", "Definition of SONIA", (i) "Statement of underlying interest". ↩

3. European Central Bank, "The euro short-term rate (€STR) methodology and policies", 2 "€STR administrator". ↩

4. Bank of England, "SONIA interest rate benchmark", "Overview" ("We are the administrator for SONIA"). ↩

5. European Central Bank, "The euro short-term rate (€STR) methodology and policies", 3.2 "Statement of methodology". MMSR reporting is based on Regulation (EU) No 1333/2014 (the ECB regulation concerning statistics on money markets). ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷

6. Bank of England, "SONIA key features and policies", "Definition of SONIA", (ii) "Statement of methodology". ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

7. Bank of England, "SONIA interest rate benchmark", "Overview" and "How we produce SONIA". ↩ ↩² ↩³ ↩⁴

8. Bank of England, "Administration of SONIA", "Reform of SONIA in 2018". ↩ ↩² ↩³

9. European Central Bank, "The euro short-term rate (€STR) methodology and policies" (March 2021), 3.1 and 5.1 "Standard daily publication arrangements". The term for the calculation days is TARGET2, as in the document. ↩ ↩² ↩³ ↩⁴

10. Bank of England, "SONIA key features and policies", "Daily publication arrangements" and "Definition of SONIA", (ii). ↩ ↩² ↩³

11. European Central Bank, "The euro short-term rate (€STR) methodology and policies", 7.1 "Republication policy". ↩

12. Bank of England, "SONIA key features and policies", "Republication policy". ↩ ↩²

13. European Central Bank, "What is T2?", the introduction and "TARGET and TARGET2: the forerunners of T2". ↩

14. Bank of England, "SONIA key features and policies", "Data quality" ("The daily production of SONIA involves data validation and plausibility checking … from 07:00 each morning"). ↩

15. European Central Bank, "The euro short-term rate (€STR) methodology and policies", 6.1 and 6.2. ↩

16. Bank of England, "SONIA key features and policies", "Short-term contingency arrangements". ↩ ↩²

17. Bank of England, "SONIA key features and policies", "Background", and "SONIA interest rate benchmark", "Overview". ↩

18. Bank of England, "SONIA key features and policies", "Definition of SONIA Compounded Index", "Daily publication arrangements" and "Calculating compounded SONIA rates from the SONIA Compounded Index". ↩

19. European Central Bank, "The euro short-term rate (€STR) methodology and policies", 5.2 and note 5, and "Euro short-term rate (€STR)", "Compounded €STR average rates and index". ↩

20. Financial Conduct Authority, "About LIBOR transition", "Transition to alternative risk-free rates". ↩

21. European Central Bank, "The euro short-term rate (€STR) methodology and policies", 1 "Background". ↩

22. European Central Bank, "Working group on euro risk-free rates", the introductory description and "€STR-based fallbacks for EURIBOR". The date of the first €STR publication is also given on the "Euro short-term rate (€STR)" page. ↩ ↩²

23. European Central Bank, "How should the market transition from EONIA to the €STR?", the main text ("modified EONIA’s methodology to become the €STR plus a fixed spread of 8.5 basis points"). ↩

24. Financial Conduct Authority, "About LIBOR transition", the introduction and "Background to LIBOR being wound down". ↩

25. Financial Conduct Authority, "About LIBOR transition", the table in "RFRs recommended as alternatives to LIBOR". ↩