Lastest BSBY News
Regional banks face soaring term SOFR spreads. Bid/offers hit 10bp as dealers price counterparty risk into non-cleared Libor transition trades
Risk.net ($) – Helen Bartholomew | 5/24/2023
US regional banks under pressure from recent interest rate hikes are seeing the cost of hedging their loan books skyrocket due to heightened concerns around counterparty risk and a widespread shift from cleared Libor swaps to more narrowly traded bilateral contracts.
BW Take: In simple speak, if Term SOFR swaps are being quoted as wide as 10 bps, we have a problem that needs to be addressed. Until now, borrowing entities have been compliant because they haven’t understood the extent of these charges and that BSBY and other credit sensitive rates are far more efficient options.
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Analysis: As sun sets on LIBOR, its successor rate may heighten bank risks
Reuters – Gertrude Chavez-Dreyfuss | 5/22/2023
The effective demise of the tainted London Interbank Offered Rate (LIBOR) next month and the switch to the risk-free rate has renewed concerns about the potential negative impact of the new measure on bank balance sheets in times of financial stress.
BW Take: With about a month to go until the “official” end of USD Libor, many are beginning to wake up to the reality of risk-free rates that often recede during times of stress resulting in escalating bank risk. Expect scrutiny on credit spread adjustments, widening Term SOFR/SOFR basis risk and the recognition of SOFR as an unsuitable solution for bank lending to steer the focus to BSBY and other CSR’s.
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Easing of trading curbs is no quick fix for term SOFR swaps. ARRC’s new guidelines will do little to improve liquidity, but may keep a lid on spiraling basis
Risk.net ($) – Helen Bartholomew | 5/15/2023
The relaxation of restrictions on trading swaps linked to a term version of the secured overnight financing rate (SOFR) may not do much to close the basis with overnight equivalents – though it could prevent the pricing discrepancy from spiraling out of control.
BW Take: Recent decisions by the ARRC to soften some Term SOFR restrictions may not find any takers until spreads move significantly wider. Credit sensitive rates like BSBY provide lending banks and borrowing entities a logical alternative that aligns with bank funding costs free from arbitrary credit spreads & systemic risk-creating restrictions.
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FRA-OIS demise leaves hole in bank treasury risk management. Banks now face ‘greater downside’ to widening credit spreads
Risk.net ($) – Bernard Goyder | 5/8/2023
Forward Rate Agreements or FRAs linked to Libor are – or were – widely used to hedge bank funding risk. The transition away from US dollar Libor marks the end of FRAs, which are incompatible with compounded SOFR.
BW Take: As we near historic deadlines for Libor, the idea that banks still need to manage their funding risk is now beginning to resonate fairly significantly. As the broader market begins to understand that regulators have NOT restricted the use of CSRs, then perhaps this material use-case for BSBY will address one of the most significant shortcomings of SOFR.
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TERM SOFR USES: GOOD NEWS FOR HEDGES, SOME RISK FOR TLBS
LSTA – Meredith Coffey, Tess Virmani | 4/26/2023
Last Friday, the ARRC released Updated Term SOFR Best Practice Recommendations. The announcement was good news for the continued availability of Term SOFR hedges, but it also creates potential risk for institutional term loans if they are determined to be securities.
BW Take: Despite a subtle contraction of Term SOFR restrictions, LSTA discusses how updated definitions to business loans introduce Term SOFR restrictions for intercompany loans and loans tied to any publicly offered security or a security offered under rule 144A. As the market and regulators look to interpret this complexity, one might expect to see alternative, less restrictive credit sensitive rates such as BSBY, begin to gain wider consideration.
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ARRC relaxes limits on trading term SOFR derivatives
Risk.net ($) – Rebekah Tunstead | 4/21/2023
In a surprise move, the US Alternative Reference Rates Committee (ARRC) will allow buy-side participation and two-sided trading in derivatives that reference a term version of the secured overnight financing rate, or SOFR.
BW Take: Although the ARRC has relaxed some Term SOFR restrictions, IDB trading will not be permitted raising questions over just how impactful this will be. As Nathaniel Wuerfel from the FRB NY recently said, “You would not want a situation where the use of term derivatives … actually cannibalizes the use of overnight interest rate derivatives based on SOFR”. An understandable quandary and one where CSRs are a logical alternative.
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BSBY Syndicated
Loan Scorecard
105
Loan Count
$
1900000000000
Loan Notional Totals
*Data limited to syndicated loans, as bilateral loan activity is less readily available as of 30-May-2023
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