When a lender quotes “SONIA + 1.75%”, the second number is theirs — the spread on our rate card and the first belongs to the market. Understanding where that first number comes from is what allows you to judge whether a facility is competitively priced and to anticipate how its cost will move.

Why benchmarks exist

Before benchmark-linked pricing, lending rates were set at the lender’s discretion. Borrowers had no independent reference against which to test whether a rate was fair, and no way to distinguish a rise driven by market conditions from one driven by the lender’s commercial appetite.

A published benchmark solves both problems. It is calculated by an independent administrator from observable transactions, published daily, and identical for everyone. When your rate moves because the benchmark moved, you can verify it in seconds.

SONIA — sterling

Sterling Overnight Index Average, administered by the Bank of England.

SONIA is the trimmed mean of interest rates paid on eligible unsecured overnight sterling deposits. It is calculated from actual transactions — not from a panel of estimates — which is precisely the reform that followed the LIBOR scandal. It is published each London business day at 09:00 for the previous day’s trading.

Because it reflects genuine overnight funding, SONIA tracks the Bank of England’s Bank Rate closely, typically sitting a few basis points below it.

SOFR — US dollar

Secured Overnight Financing Rate, administered by the Federal Reserve Bank of New York.

SOFR measures the cost of borrowing cash overnight collateralised by US Treasury securities. Its transaction base is enormous — roughly a trillion dollars daily — which makes it exceptionally difficult to manipulate.

The key structural difference from SONIA: SOFR is secured. Because the lending is collateralised by Treasuries, it carries almost no credit risk premium, so in periods of banking stress SOFR can fall while unsecured rates rise. It is also more sensitive to short-term collateral supply and demand, which produces occasional spikes around quarter-ends.

EURIBOR — euro

Euro Interbank Offered Rate, administered by the European Money Markets Institute.

EURIBOR is the outlier of the three. It is a term rate rather than an overnight rate, published for several maturities — one week, one month, three months, six months and twelve months — and it reflects unsecured interbank lending. Its methodology now uses a hybrid waterfall that prioritises real transactions but permits modelled inputs where transaction data is thin.

Because it is a term rate, EURIBOR embeds market expectations of where policy rates will be over the period. It therefore moves ahead of European Central Bank decisions rather than merely following them.

What moves the benchmarks

Central bank policy is the dominant driver. Overnight rates track policy rates almost mechanically.

Policy expectations matter more for term rates. Three-month EURIBOR will price in an expected cut before it happens; overnight SONIA will not move until it does.

Liquidity conditions produce short-term dislocations — quarter-end and year-end balance-sheet management routinely pushes secured rates around by several basis points.

Credit conditions separate secured from unsecured benchmarks. Stress widens the gap between SOFR and unsecured measures.

What this means for a margin facility

Three practical consequences:

Your rate is floating. If the benchmark rises 50 basis points, your all-in rate rises 50 basis points at the next reset. On a £500,000 balance that is £2,500 a year. Budget for the rate you might pay, and model it before you draw, not just the one you pay today.

The spread is what you actually negotiate. The benchmark is the market’s; the spread is the lender’s. Comparing facilities means comparing spreads at your expected balance — a headline all-in rate quoted on different benchmark dates is not a like-for-like comparison.

Currency choice affects cost. The same portfolio financed in sterling, dollars or euros will carry different benchmarks. Borrowing in a lower-benchmark currency to fund an asset denominated in another introduces currency risk that will almost always dwarf the interest saved. Match the loan currency to the asset currency unless you are deliberately taking an FX position.

Verifying the benchmark

Each administrator publishes historical series free of charge — the Bank of England for SONIA, the New York Fed for SOFR, EMMI for EURIBOR. If a statement’s benchmark does not match the published fix for the relevant date, ask which date was used and why.

This article is general information and not investment advice.