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Alternative Reference Rates Committee (ARRC) meeting highlights – May 25, 2023

Alternative Reference Rates Committee | 5/25/2023

Highlights from the Alternative Reference Rates Committee (ARRC) meeting on May 25th discussed momentum towards SOFR and the transition-related progress being made.
BW Take: With just a month to go until the cessation of the USD LIBOR panel, the May ARRC meeting reviewed the significant progress being made on this gargantuan transition. Topics touched on loan remediation, fallbacks, and the use of the DTCC LIBOR Replacement Index Communication Tool for the communication of post 6/30 LIBOR contract rate changes.

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Regional banks face soaring term SOFR spreads. Bid/offers hit 10bp as dealers price counterparty risk into non-cleared Libor transition trades ($) – 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 ($) – 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 ($) – 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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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 ($) – 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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Fed-Backed ARRC Expands Use of Forward-Looking SOFR Rates

Bloomberg News ($) – Alexandra Harris | 4/21/2023

A Federal Reserve-backed body said it will expand its recommendations to allow more market participants to use longer-dated benchmarks tied to the Secured Overnight Financing Rate, paving the way for broader use of forward-looking rates.
BW Take: Despite repeated statements against expanding the use of Term SOFR, a Friday release by the ARRC has addressed the growing systemic risk by loosening restrictions on Term SOFR trading allowing banks to transact Term SOFR swaps with non-bank entities such as hedge funds to offset the growing basis risk on their books. While this is a step forward, it does little to rationalize the use of a risk-free rates for lending when credit sensitive rates like BSBY and Ameribor remain far more appropriate solutions.

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7RIDGE Acquires AFX

Traders Magazine | 4/19/2023

7RIDGE, a specialized growth equity firm invested in transformative technologies for financial services, has acquired a 100% stake in The American Financial Exchange (AFX), an electronic exchange for direct lending and borrowing for American banks and financial institutions.
BW Take: As the June 30 Libor deadline approaches, over 70% of the $1.7 trillion leveraged loan market REMAINS poised to convert to SOFR. With this transition, the role of credit sensitive rates in the post Libor world are just beginning to be realized. CSRs like BSBY and AFX’s Ameribor are the market’s answer to many deficiencies that a risk free rate like SOFR has exposed to the markets and the acquisition of AFX by 7Ridge bears very close watching in the months ahead.

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The pain and SOFRing are almost over. Meet the new boss, surprisingly different from the old boss

Financial Times ($) – Alexandra Scaggs | 4/5/2023

The plan was that ICE would stop publishing the scandal-ridden benchmark at the end of June 2023. Then the FCA announced Monday that daily rates would be published through September 2024.
BW Take: By reverse engineering SOFR to look like Libor, regulators are “creating” synthetic Libor through June 2024 to address the huge number of contracts that continue to face Libor. To put into context, they’ve taken a risk free overnight rate and jerry-rigged it with a separate term SOFR rate and separate credit spread adjustments to look, dare I say it, just like Libor! At some point, the idea of a credit sensitive rate based on actual transactions with a legitimate term structure will resonate. BSBY anyone?

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BSBY Syndicated
Loan Scorecard

Loan Count
$ 2000000000000
Loan Notional Totals

as of 18-Mar-2022

CME Eris BSBY Launch

Expected Launch


April 10, 2022

(Subject to Regulatory Review)

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Regulatory News

Alternative Reference Rates Committee Meeting Readout

ARRC | 5/18/2022 Topics discussed included CME Group’s SOFR First for Options, momentum towards the Secured Overnight Financing Rate (SOFR), results from the latest sentiment survey of ARRC members, ARRC working group updates, and work evaluating 12-month Term SOFR. BW Take: As the momentum of SOFR adoption increases, the ARRC meeting highlighted how SOFR swaps accounted for 80% of interest rate risk while SOFR futures volume and open interest closes in on Eurodollar futures volume. Read More ≫

TRANSITION TO RFRs REVIEW: First Quarter of 2022

ISDA | 4/29/2022 SOFR IRD increased to $12.8 trillion in the first quarter of 2022 vs $5.6 trillion in the fourth quarter of 2021 accounting for 28.2% of US dollar-denominated OTC IRD vs 17.1% in the last quarter of 2021. SONIA IRD decreased by 28.2% to $6.1 trillion in the first quarter of 2022 vs $8.5 trillion in the fourth quarter of 2021 accounting for 99.6% of sterling-denominated IRD traded notional vs 91.5% in the fourth quarter of 2021. €STR IRD increased by 173.5% to $7.3 trillion in the first quarter of 2022 vs $2.7 trillion in the prior quarter accounting for 27.8% of euro-denominated IRD traded notional compared to 22.0% in the fourth quarter of 2021. IRD referencing LIBOR denominated in US dollars, sterling, Swiss franc, yen and euro, as well as EURIBOR and TIBOR, rose by 30.5% to $37.2 trillion in the first quarter of 2022 compared to $28.5 trillion in the fourth quarter of 2021. Read More ≫ Share on LinkedIn

ISDA SwapsInfo First Quarter of 2022 Review: Summary

ISDA | 4/29/2022 The latest ISDA SwapsInfo Quarterly Review shows that trading volume for interest rate derivatives (IRD) and credit derivatives increased in the first quarter of 2022 compared to the first quarter of 2021. This summary provides a high-level overview of key trends in the first quarter of 2022. Read More ≫

Highlights from the ARRC meeting on March 23, 2022

ARRC 3/23/22 | 3/23/2022 Topics discussed at the meeting included federal LIBOR legislation, momentum towards the Secured Overnight Financing Rate (SOFR), results from the latest sentiment survey of ARRC members, and work evaluating 1-year Term SOFR. BW Take: In addition to discussing passage of the Consolidated Appropriations Act of 2022 which provides a workable solution for tough legacy Libor contracts, the monthly ARRC discussed the momentum of SOFR adoption where SOFR swaps now account for around 80 percent of interest rate risk traded in the outright linear swaps market and average daily SOFR futures volumes increased by 50 percent month-over-month in February. Additionally, SOFR futures volumes and open interest continue to increase relative to Eurodollar futures and the overall STIR futures market Read More ≫

Highlights from the  ARRC meeting on February 16, 2022

ARRC | 2/16/2022 Topics discussed at the meeting included the momentum towards the Secured Overnight Financing Rate (SOFR) and the ARRC’s key objectives for 2022 BRN Take: The Alternative Reference Rate Committee discusses the broad adoption of SOFR across linear, non linear and exchange traded derivatives, cross currency swaps, cash instruments and syndicated loans. Read More ≫

Alternative Reference Rate Committee (ARRC) Newsletter: December 2021 to January 2022

ARRC | 1/25/2022 1. The December 31, 2021 end of sterling, yen, swiss franc, and euro LIBOR achieved a major milestone in the LIBOR transition without market disruption. 2. Progress in the transition to the Secured Overnight Financing Rate (SOFR) accelerated across cash and derivatives markets ahead of the 2021 year-end milestone and into 2022. 3. The U.S. Department of the Treasury and Consumer Financial Protection Bureau (CFPB) issued final rules relating to the transition away from LIBOR. BW Take: The ARRC monthly discusses the global strength of the Libor transition and how SOFR is dominating both the cleared swap risk and syndicated loan activity relative to Libor. As the spread between risk free and credit sensitive rates like BSBY widen, a multi rate environment may begin to gain momentum. Read More ≫

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BSBY Swaps ADV: Notional value traded of bilateral and cleared interest rate swaps referencing Bloomberg Short-Term Bank Yield Index divided by the number of trading days in each month (i.e. Average Daily Volume)

CME BSBY Futures ADV: Futures contracts ($1 million notional) traded of Three-Month Bloomberg Short-Term Bank Yield Index (BSBY) Futures on CME divided by the number of trading days in each month (i.e. Average Daily Volume)

Source: Clarus Financial Technology data

3M Libor: 3-Month USD Libor (US0003M Index)

3M BSBY: 3-Month Short-Term Bank Yield Index (BSBY 3M Index)

O/N SOFR: Secured Overnight Financing Rate (SOFR Index)

3M Term SOFR: 3-Month CME Term SOFR (SR3M Index)