The UK’s Bank of England (BoE) has said it wants the Sterling Over Night Index Average — known as Sonia — to replace the now infamous, scandal hit London Interbank Offered Rate (Libor) in setting commercial sterling interest rates by end of 2021.

BoE governor Mark Carney said in a speech to bankers in London:

It has become increasingly clear that we cannot rely on Libor in the long term.

The Libor rate is used to decide the value for trillions of pounds worth of loan contracts between banks and, in the aftermath of the 2008 global financial crisis, was found to have been manipulated by traders to profit the banks they worked for.

Many banks have since been fined by various countries’ banking watchdogs and some traders have been jailed.

However, Carney warned the banks which currently quote the interbank lending rates that are used to calculate the Libor rate might pull out and precipitate the benchmark’s collapse.

He said this “raises obvious financial stability concerns”.

Reuters reports that Barclays chief compliance officer Francois Jourdain would remain chair of the group, aided by Shell finance executive Frances Hinden and Legal & General Investment Management’s Simon Wilkinson as vice-chairs.

It is unclear what would then happen to the Libor rate after 2021 and whether it would continue to used by banks.

What is Sonia?

Sonia is the effective reference overnight rate for unsecured transactions in the sterling market, overseen by the Sonia advisory committee, part of the Bank of England.

Changing from using the Libor rate to the Sonia rate appears to be an attempt by the BoE to include fund managers and non-financial companies that issue debt, as well as bankers in setting commercial sterling interest rates.

Each London business day the Sonia fixing is calculated as the weighted average rate of all unsecured overnight sterling transactions brokered in London by Wholesale Markets Brokers’ Association (WMBA) members between 12am and 3.15pm London time in a minimum deal size of £25m.

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It was launched in March 1997 by the WMBA, and is endorsed by the British Bankers Association (BBA).

Before Sonia, the WMBA had no Sterling overnight funding rate, creating volatility in the overnight interest rate.

After Sonia was created it gave a stability to overnight rates and encouraged the creation of the Overnight Index Swaps markets and the Sterling Money Markets.