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What the Proposed Reform of Sonia Means for the Buy-Side

The Bank of England recently released a consultation paper on reforming its £46 trillion Sterling Overnight Index Average (SONIA) benchmark. As outlined in this Finextra article, the consultation focuses on three key areas: expanding the coverage of input data for the benchmark, reviewing SONIA benchmark methodology, and weighing up the need for a change in the publication of the benchmark.

While it is true the Bank of England is launching this consultation to ensure SONIA is as robust and representative of the market as possible, it is also largely being driven by the need to achieve compliance with the new EU Benchmarks Regulation. The Regulation, which entered into force on June 30th, aims to increase the integrity of benchmarks to ensure against manipulation. Under the terms of article 27 of the Regulation, benchmark administrators must provide a definitive statement of their benchmark, and it is largely this stipulation the Bank of England is looking to address.

This development should be followed closely by buy-side firms, as it is an early indicator of the scale of the impact the EU Benchmarks Regulation will have on the market. Over the months ahead, we can expect major benchmark providers to carry out similar time-consuming consultations, followed by changes to how they validate input data and the overall methodologies that underpin their benchmarks. Administrators have no choice but to undertake these expensive compliance measures if their benchmarks are to continue to be used by asset managers in the EU.

The market is playing out of what RIMES has predicted for some time now. The EU Benchmarks Regulation, while necessary, will add further cost to the administration of benchmarks. In our opinion, some or all of this cost will be passed on to the buy-side. There will also be a period of turbulence while benchmark administrative processes are reworked. Benchmark administrators will, of course, do all in their power to limit disruption to the market, but some will be inevitable. It is even likely that administrators of some of the more niche benchmarks might find it cost effective to simply discontinue the benchmark rather than shoulder the cost of compliance.

Buy-side firms therefore need to do all in their power to limit the increase in the cost and complexity of benchmarks data management within their firms. Our advice is for asset managers to investigate managed data services such as those offered by RIMES as one solution to this challenge. By taking managed data services, firms can lower the total cost of data management by leveraging economies of scale. The approach also insulates buy-side firms from growing complexity by leaving the management of increasingly dynamic benchmarks data in the hands of experts.

The EU Benchmarks Regulation will bring big changes to the benchmarks industry. However, RIMES believes that managed data services can help buy-side firms avoid the most negative of these changes, while future-proofing their data management capabilities for any future regulatory burdens.

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