UAE Central Bank to launch new index for overnight funding transactions

The Dirham Overnight Index Average will provide relevant data to the overall state of the actual interbank market and will be implemented from December 7

The UAE Central Bank expects that Donia will serve as an anchor for banks in determining factors relevant to their daily fixing of interbank rates. Ryan Carter / The National

The Central Bank of the UAE will publish a new index for actual overnight funding transactions denominated in dirhams as part of the new Dirham Monetary Framework implementation plan.

The Dirham Overnight Index Average will be implemented from December 7 and aims to provide market participants with relevant data on the overall state of the actual interbank market, as well as to improve transparency in domestic money market activities.

“The publication of this new reference rate will not only provide additional transparency to the dirham money markets, but also help the central bank in ensuring overnight money market rates are aligned to prevailing base rate,” Central Bank Governor Khaled Balama said in a statement on Sunday.

Overnight financing is a fee that is paid to hold a trading position overnight on leveraged trades and is essentially an interest payment to cover the cost of the leverage used overnight. Charges are applied to positions that have no set expiry date.

The central bank expects that Donia will serve as an anchor for lenders in determining factors relevant to their daily fixing of interbank rates (Emirates Interbank Offered Rate). The regulator has no plans to discontinue Eibor once Donia is published, as both will co-exist in the domestic markets.

"At this stage, Donia shall not be used to price financial market products offered or structured in the UAE," a statement said.

Donia is the effective overnight reference rate for the dirham. It is aimed at improving monetary policy transmission in the UAE and is a true reflection of conditions in the actual local interbank market.

The index – constructed using best global practices and in line with similar interbank indexes published in other leading jurisdictions – is computed as a volume-weighted money market rate for all overnight secured and unsecured funding transactions of Dh10 million or greater contracted by all banks operating in the UAE and captured through the UAE Funds Transfer System.

It will be published on official UAE working days by 9.30am local time on the central bank's website and through Bloomberg and Refinitiv Eikon.