SONIA, ESTR, TONA and Global Risk-Free Rates
SONIA, €STR, and TONA are the UK, eurozone, and Japanese equivalents of SOFR — overnight rates computed directly from real transactions, replacing the panel-submitted LIBOR-style rates that regulators no longer trust.
Prerequisites: SOFR and Risk-Free Rate Benchmarks
After LIBOR was shown to be manipulable because it relied on banks' self-reported estimates, every major currency needed a replacement benchmark computed from something harder to fake: actual overnight transactions. SONIA (Sterling Overnight Index Average), €STR (euro short-term rate), and TONA (Tokyo Overnight Average Rate) are the UK, eurozone, and Japanese versions of this same idea — each a volume-weighted average of real overnight unsecured lending rates in its own currency.
SONIA, €STR, and TONA are all overnight rates computed from actual reported transactions rather than bank estimates, making them the risk-free-rate replacements for GBP, EUR, and JPY LIBOR respectively, in the same way SOFR replaced USD LIBOR.
Because these are overnight rates rather than the 1-month, 3-month, or 6-month terms LIBOR quoted, using them for term lending requires compounding the daily rate over the loan period, usually calculated in arrears once the actual daily rates are known rather than fixed in advance the way a LIBOR rate was.
Worked example. A loan references daily SONIA compounded over a 3-month period. If SONIA averages 5.10% across the roughly 90 days of the period, the borrower's interest rate for that period comes out close to 5.10%, but the exact figure isn't known with certainty until near the end of the period, unlike 3-month LIBOR, which was fixed and known on day one.
This "in-arrears" character was one of the main operational headaches of the LIBOR transition, requiring new systems to calculate interest that isn't fully known until close to the payment date.
Further reading
- Bank of England, ECB, Bank of Japan — respective risk-free rate methodology publications