It confusingly shares a name with a Staines minicab operator…
And a Swedish children’s book…
But this Ronia (short for Repurchase Overnight Index Average) is going to be very special in its own right. It’s a brand new repo-based rate for the UK interbank market, and a serious threat to the dominance of Libor. Above all, it’s the formal crystallisation in sterling markets of the huge, balance sheet-shaking post-crisis trend towards secured lending among banks (which has already swept the euro market).
Ronia’s big news.
It should really have happened months ago. But it formally launches this week. As the FT reports:
The rate, created for sterling loans, will help UK banks and building societies as well as international institutions, which also trade in the pound, improve the hedging of their rate risks.
The Repurchase Overnight Index Average (Ronia), to be published by the Wholesale Market Brokers’ Association, which represents interdealer brokers, is a secured rate. This means it is the rate banks charge each other for loans using collateral.
It’s the repo market’s answer to Libor but it is calculated more like Sonia, which is also overseen by the WMBA. A weighted average is taken of overnight cash transactions in GBP by member dealers. It seems technical, but it’s actually quite a selling point — more on this in a bit.
What’s critical — there a few features of Ronia which make it an interesting development even among other secured rates, and represent key developments in the markets for repo and quality collateral in general.
We’ll start with why you’d use Ronia in comparison to unsecured lending rates. In a note published in March (when the finishing touches were being added to Ronia) Nomura analysts posted an enticing chart:
As you can see Ronia is tracking actual repo rates much better than Sonia. It’s therefore an attractive hedging tool to repo transactions, coming along just as the market is growing and becoming ever more complex. Plus, this other Nomura chart — focused on Libor — is also part of the case for Ronia, we think:
Libor is real punch-bag these days, in terms of how much funding is actually executed using it as a reference (none) but we think it’s still worth pointing out that it will rise as the Bank of England withdraws its special liquidity operations to banks. Sonia has already played a role in allowing banks to reduce this rate exposure. Ronia effectively shuts the exposure off completely.
There’s another fascinating aspect of Ronia worth mentioning. It’s generally acknowledged that the rise of secured lending is sucking quality collateral out of the system, as evidenced by government bonds going special. Seems Ronia has a way to prevent or at least arrest its reference government bonds from doing this, as per the WMBA’s specification for Ronia:
RONIA eligible transactions are Delivery by Value (DBV) which is a mechanism whereby a CREST member who has borrowed money against overnight gilt collateral may have gilts on its account to the required value delivered automatically by the system to the CREST account of the money lender…
So as Nomura argued in their March note, Ronia’s bucket of collateral is therefore primed not to deliver ‘special’ issues, although clearly only time will tell how the market works in practice.
Last but not least though — this issue of calculation.
Here’s Nomura with what we can only call some interbank cattiness:
Moreover, the proposed RONIA calculation is to be based on actual traded rates rather than best bids as supplied by a panel of banks. Given recent debates over the validity of the latter process over Libor fixings in particular, this will likely add credibility to RONIA as well…
Oh dear.
Related links:
A Libor lawsuit – FT Alphaville
From the Libor file – FT Alphaville
The privatisation of liquidity ops – FT Alphaville