Sterling money markets: beneath the surface

By Rob Harris and Tim Taylor of the Bank’s Markets Directorate.

• This article presents analysis based on the Bank’s new Sterling Money Market data collection.
• The vast majority of unsecured money market activity is in the overnight market that underlies the SONIA benchmark. Longer-maturity trades are scarce and have volatile daily average interest rates.
• We present evidence that suggests the overnight unsecured market is dynamic and competitive, and show that average rates in the overnight gilt repo market vary according to the collateral used.
• These observations support market-led efforts to promote the use of SONIA in sterling markets.

Overview

The sterling money markets play a key role in the implementation and transmission of monetary policy. The Bank now collects granular data on sterling money market transactions, providing new insights into these markets. A subset of these Sterling Money Market (SMM) data will, from April, be used as the inputs to the sterling overnight index average (SONIA) benchmark, as planned reforms take effect. 

To increase market transparency, the Bank intends to use the new data to publish summary statistics of activity in the broader sterling money markets on a regular basis. This article presents example statistics for the first time.

We also use this new, comprehensive data set to shed light on the market for term unsecured deposits. Transactions are overwhelmingly completed overnight. Beyond that maturity, the average daily value of term deposit transactions is generally low (summary chart), rarely exceeding £1 billion at maturities of one month or longer. Average rates at these terms are also highly volatile, albeit around a clear trend.

By comparison, the average value of transactions soon to underpin SONIA - capturing overnight unsecured deposits which are £25 million or larger - has been on average close to £50 billion per day, and the headline rate is very stable.

Underlying this stability, our analysis suggests that there is an active core of depositors in the overnight unsecured market measured by SONIA. We find evidence of a dynamic pattern of bank-depositor relationships, consistent with a competitive market environment where depositors can, and do, move their business around.

Summary chart The vast majority of turnover in sterling unsecured deposits is overnight, with little activity at longer maturities^(a)

Sources: SMM data collection and Bank calculations.
(a) Daily average from 1 September to 30 November 2017, by original maturity.
(b) With a minimum transaction size of £1 million. Transactions underpinning reformed SONIA are £25 million or greater.

The SMM data also show strong levels of activity in the overnight gilt repo market. We show that rates vary according to the collateral used in these transactions, and that the distribution of rates varies considerably over time.

Our observations support the direction of ongoing market-led reforms to how interest rate benchmarks are used in sterling financial markets. A desire for benchmarks to be based on transactions implies a shift away from Libor towards overnight benchmarks. In sterling the market’s preferred alternative, SONIA, provides a robust alternative to Libor without the additional complexities that can affect gilt repo rates.

Sterling money markets: beneath the surface