A single curve would have many potential benefits:   It is the logical completion of the move away from LIBOR discounting to SONIA-referencing OIS discounting begun a decade ago, eliminating the basis between swap exposures and how they are valued, and thereby simplifying risk management of swaps portfolios;    It could simplify the risks arising from the optionality embedded in certain products such as credit facilities where funds can be drawn across multiple tenors of benchmark reference rates;    It would simplify curve construction and validation processes;  8  All speeches are available online at www.bankofengland.co.uk/news/speeches  8    A switch from term to overnight compounding would provide customers with the scope to construct a more complete interest rate hedge by using the minimum possible period for each observation 5; and    It could help guide further ‘electronification’ of the sterling market, through the provision of executable quotes and central limit order books, which itself could provide new opportunities for product development. The potential role that a well-specified SONIA curve could play in helping to price cash instruments has been the subject of a great deal of discussion amongst market participants. Many issuers have found it easier than had been initially expected simply to use compounded realised SONIA as a reference rate. This has rapidly become a convention for a range of sterling Floating Rate Notes and securitisations; and recent announcements suggest similar approaches are also feasible for a range of corporate bonds and loans.

Not only will this increase the efficiency of those compression mechanisms, reducing the system-wide gross notional position, it will also reduce operational and counterparty risks for the system as a whole through the increased use of clearing. An infrastructure forum held at the Bank earlier this year revealed substantial interest from firms across the sterling markets to exploit these opportunities.9  For example, this removes so-called ‘stub risks’ which arise from the potential for interest rates to change during the period covered by term fixings, typically of say, 3 or 6 months in the case of common LIBOR swaps. 6 See for instance https://www.risk.net/derivatives/6726026/abp-noteholders-agree-frn-change-from-libor-to-sonia and https://www.rbs.com/rbs/news/2019/06/natwest-to-offer-markets-first-sonia-loan.html 7 The global FSB also recently issued a ‘user guide’ designed to show the potential benefits of linking new business to daily risk free rates, available at: https://www.fsb.org/wp-content/uploads/P040619-1.pdf 8 https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/statement-on-the-progress-on-adoption-of-risk-free-rates-insterling-markets.pdf?la=en&hash=24893EB812640CC61E640BEB98D8E7415439210B 9 Material from this event on 31/01/19 is available at https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-fromlibor 5  9  All speeches are available online at www.bankofengland.co.uk/news/speeches  9  These observations illustrate only a small fraction of the ways in which transition away from LIBOR will change the landscape of sterling markets for the better. They are benefits for the market, and the economy, as a whole. But those who get there first stand to gain the most. Intermediaries, lenders and infrastructure providers who win the race to be ready to transact in SONIA, or develop and market innovative SONIA-based products, are more likely to be rewarded with larger syndicate shares, stronger and more remunerative loan growth, or more favourable flow revenue.