Goodbye Sonia flat: banks rethink swaps with bond collateral

Barclays, Citi, HSBC and Lloyds Bank are among dealers now adding an extra spread when discounting bond-collateralised swaps – which eats into the profits pension funds can see. Funds do not like the change but privately agree banks have a point

A fond farewell? Some traders are 'exasperated' by the loss of Sonia flat

Imagine the scene: you are a UK pension fund, with some big, long-dated, fixed-rate receiver swaps outstanding. Record-low interest rates mean you are heavily in the money, and you want to bank some of those paper gains, so you decide to recoupon the trade – essentially, bringing down the rate you receive in return for a payout.

The dealer, though, says it has changed the way it values the trade – it is now using a different, higher rate to discount future cashflows, meaning your payout has