2011-06-06 – London
RONIA, the Repurchase Overnight Index Average Rate, is a new measure of interbank lending rates. Launched today, the measure is aimed at improving the ability of market participants to hedge certain types of investment.
RONIA, published daily at 5pm UK time by the Wholesale Market Brokers’ Association (WMBA), is the weighted average rate of secured sterling overnight cash transactions.
WMBA already publishes an overnight rate for unsecured cash transactions, SONIA (Sterling Overnight Index Average).
The advantage of RONIA over SONIA is that it is based on secured lending transactions, which have grown rapidly in number since 2007 (currently accounting for over 40 percent of the overnight lending market, according to the WMBA). Until now, only SONIA swaps could be used to hedge the risk of buying gilts with borrowed money.
According to the officially published definition on the WMBA website:
“GBP-WMBA-RONIA” means that the rate for a Reset Date calculated in accordance with the formula set forth below in this clause”, will be the rate of return of a daily compound interest investment (it being understood that the reference rate for the calculation of interest is the Sterling Repo daily overnight reference rate).
According to the WMBA website, GBP-WMBA-RONIA will be calculated as follows:
“A Secured Overnight Index Swap (SOIS) is a repurchase agreement in which securities are sold provided that they will be repurchased on the following day. Financial institutions use overnight repos as a means of raising short-term money for financing inventories through either:
- a short-term loan funded by an overnight deposit, or
- an overnight loan funded by a short-term deposit
“
