Minutes of the SONIA Stakeholder Advisory Group - 26 April 2024

Minutes

1: Welcome / introductions

The Chair welcomed the Group.

2: Diversity, Equity & Inclusion

Presentation on the Bank’s Meeting Varied People initiative

Bank staff provided a presentation on the Bank’s Meeting Varied People (MVP) initiative. This is a strategic priority which aims to improve diversity of the Bank’s contact base and support diversity objectives. These objectives include achieving greater diversity in the Group’s membership and supporting change in the wider industry.

The MVP initiative actively supports a pipeline of diverse talent among market participants by encouraging firms to include diverse contacts in interactions with the Bank, providing opportunities to establish relationships with Bank staff earlier in careers and develop understanding of the importance of diversity to drive change.

In recognition of the importance of diversity and inclusion as a strategic priority, the Terms of Reference were updated to include additional wording supporting this positive aim.

SSAG Diversity & Inclusion plan

Members reviewed suggestions to enhance diversity and inclusion within the Group, including inviting colleagues as observers, creating educational agenda items and potentially measuring and monitoring diversity and inclusion.

The observer programme was discussed and it was noted that this has been successfully initiated in other Bank market committees, benefiting colleagues who may not usually be exposed to the Bank. This has been seen as a continuous opportunity to engage with the Bank and provide input from a diverse range of perspectives. Members welcomed the initiative.

The Group discussed future educational agenda items and members volunteered to take the lead on certain items in future meetings. Topics would focus on sterling markets and members’ interaction, showcasing knowledge and experience to support increased awareness for the Group.

Bank staff discussed potentially using a survey of attendees to gather data on diversity of meetings and using this as a means of focussing on increasing diversity over time and developing the talent stream. The survey is in development but it is hoped to be introduced in the near future.

3: Knowledge Sharing

Short Term Repo facility usage

Bank staff provided an overview of the Short Term Repo (STR) facility, which supplies reserves on demand at Bank Rate versus gilt collateral, on a weekly basis. The facility ensures short term interest rates remain aligned with Bank Rate. The Bank expects increased usage of its facilities as the level of reserves in the system falls. This expectation is noted in the Market Notice, which highlights the facility is for regular use.

The Group discussed sterling market dynamics and function and welcomed the presentation on STR usage. Members noted the facility was efficient and useful, particularly in acting as a backstop for the repo market. Use of the facility has increased recently as overnight repo rates have moved above Bank Rate. This has coincided with a reduction in SONIA volumes and an increase in the SONIA fixing.

Bank staff discussed the levels of liquidity in the banking system, the evolution of the Bank’s balance sheet and the progress of Quantitative Tightening (QT). As the Bank’s balance sheet reduces to a new normal level, through QT and maturity of the Term Funding Scheme (TFSME) is expected to have reduced significantly by the end of 2025, at some point the stock of reserves will approach the minimum level needed by Banks – the Preferred Minimum Range of Reserves (PMRR).The Bank operates the Short Term Repo facility (discussed above) to ensure that Banks have access to reserves as needed. The Bank expects greater use of facilities, including the STR, as it nears the Preferred Minimum Range of Reserves.

Members noted a demand for longer term funding requirements which satisfy Net Stable Funding Ratio requirements (NSFR) once QT has been delivered. Some members noted that in time a Bank of England repo facility offering 1 year term would be more optimal, from an NSFR perspective.

The Group discussed liquidity demand, the impact on SONIA, the drivers of activity and key pressures in the system. Members noted evolving nature of money markets and Bank staff confirmed that there remains flexibility within the definition of SONIA to evolve the benchmark if required.

4: Retrospective review of market conditions

Members discussed the flow of activity in SONIA market and the drivers which influence this. Activity in money market funds, overnight repo and funding levels in Euro markets have contributed to volumes and fixings.

It was noted that volumes fell in the first months of the year, driven by higher yields in overnight repo and lower assets under management in money market funds. There were significant outflows at March month-end and noticeably, movements in SONIA lagged behind movements in repo rates. This was mainly due to changing liquidity requirements of investors and speculation over the persistence of higher repo rates. Members expected the unsecured overnight volumes to remain suppressed through the current period of higher overnight repo as lenders source higher yielding liquid assets. However, members also noted a natural appetite for a certain minimum level of overnight unsecured deposits, given repo trading is undertaken in the morning whereas unsecured remains open into the afternoon.

5: Horizon scanning

The Group noted issues around clearing events and the impact of money market regulations in the US. This had largely dissipated as regulations were less stringent than had been muted by participants.

Members noted the potential impact of a change in the Minimum Reserve Requirements (MRR) at the ECB. This had recently been published and the MRR was maintained at 1%, however concern remains should this increase over time.

6: RFR Update – Liquidity in SONIA derivatives markets

The 20 March 2024 marked the last publication of a LIBOR setting. Contributions from participants during the transition from LIBOR to SONIA were noted and members were thanked for their support. Synthetic LIBOR for 1,3 and 6m USD LIBOR will cease to be published after September 2024, with the earlier than expected termination demonstrating the success of the transition.

Members commented on the improving liquidity in SONIA derivatives markets, as volumes have increased to levels similar to short term interest rate swaps pre-transition. This was a welcomed progression in SONIA referencing markets, as significant liquidity had been drained following recent economic events.

7: AOB

No further business was discussed.

Attendees

Chair: Caroline Stockmann (Independent member of SONIA Oversight Committee)
External Member: Alexandra Innes (Independent member of SONIA Oversight Committee)
HSBC: James Murphy
ICE Futures: Uriel Amitai
Insight Investments: Chris Brown
Independent Participant: Olivia Maguire
LCH: Philip Whitehurst
LGIM: John Wherton
Mizuho: Dominic Duncan
NatWest: Oliver Butcher
Rabobank: Chirag Patel
Société Générale: Romain Sinclair
TP ICAP: Philip Chilvers

Observers

Société Générale: Gaurav Aidasani
Bank of England: Joe Clouting, Johhny Elliot, Araminta Eyre, Michael Foster, Joanna McLafferty, Kirstine McMillan, Arif Merali, Jon Paxton, Iain Ramsay, Joe Smart, Laura Wightman, Ashley Young

Apologies

Blackrock IM
Goldman Sachs
ISDA
RBC Capital Markets
JM Morgan AM