SONIA futures analysis

Marc Henrard from muRisQ Advisory takes an in depth look at the CurveGlobal Three Month SONIA Futures as the markets await the cessation of GBP LIBOR and prepares for numerous conversions in December.

Key findings

SONIA Futures are better hedge instruments than LIBOR Futures - CurveGlobal Three Month SONIA futures are a better risk management tool than LIBOR based Three Month Sterling futures. The lack of fixing risk makes these ideal hedges for swaps.

Convexity adjustment - analyses associated convexity adjustments for CurveGlobal Three Month SONIA futures – concluding that the convexity is similar in scale to LIBOR based futures.

Portfolio Margin savings - concludes that significant cost savings are achievable when CurveGlobal Three Month SONIA futures are cleared with OTC positions at LCH, where Initial Margin can be reduced by up to 80%.

Quantifies a Portfolio Margining example: Demonstrates the importance of portfolio margining on the model price of a two year strip of CurveGlobal Three Month SONIA Futures (In the scenario where IM cost the user 100bp this generates a model price savings to c.0.75 ticks (1.5X minimum price move).