Ronia-Based Swaps Trading to Start Next Month as Gilt Hedge

The Wholesale Markets Brokers’ Association said trading in derivatives based on its repurchase overnight index average, or Ronia (RONIA), will start next month, offering a hedge against pound-denominated bond investments.

ICAP Plc, Tullett Prebon Plc, Tradition U.K. Ltd. and BGC Partners will serve as brokers for the derivatives, which are swaps contracts with maturities as long as 12 months, Alex McDonald, chief executive officer of the WMBA in London, said in a telephone interview.

“A group of dealers informed us they intend to start making markets in swaps referencing the Ronia daily fixing from April 17,” McDonald said on March 13. There will be “about seven market makers” that provide bids and offers for trading the products, he said.

Ronia (RONIA) is a weighted average of so-called repurchase agreements based on trades struck between midday and 4:15 p.m. in London. It’s a benchmark of secured money-market trades designed to allow investors to protect against moves in collateral-backed overnight lending rates.

The Ronia rate was 0.473 percent at 5 p.m. London time, from 0.454 percent at the end of last week. That’s down from 0.527 percent on March 7, the highest level since Oct. 27.

Financial institutions use overnight repurchase agreements, or repos, as a way of raising short-term money for financing holdings of securities, such as bonds.

‘Cost of Funding’

“Ronia captures the cost of funding in the repo market, so it’s a more accurate hedging tool for banks who are trading gilts,” said Don Smith, an economist at ICAP in London.

“It gives the sterling market another index with which to hedge itself,” said Stuart Giles, the head of business analysis at Tradition in London.

Changes in Ronia and Sonia, the sterling overnight interbank average for unsecured loans, may show signs of funding pressures in the money markets, according to Giles.

“The relationship between Ronia and Sonia is key,” Giles said. “The correlation between the two would indicate moments of stress in the market.”

The Sonia rate was 0.486 percent, according to data compiled by Bloomberg.

A message left with the press office at BGC wasn’t returned. A spokeswoman at Tullett said the company wasn’t able to comment.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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