International: Boats against the current? Credit-sensitive rates after LIBOR

Baker McKenzie (R) – Mark Tibberts, Caitlin McErlane, John F. Lawlor | 8/22/2023

The IOSCO 7/3 statement that the administrators of the Bloomberg Short-term Bank Yield Index (BSBY) and Ameribor should refrain from representing that such rates comply with the IOSCO Principles seems like a death knell for USD credit-sensitive rates (CSRs). Despite this “guidance”, some lenders have indicated a preference for rates like BSBY that reflect counterparty credit risk and the US LIBOR Act permits US banks to use such rates regardless of the IOSCO statement and lack of regulatory oversight.
BW Take: By ignoring the variability of funding costs between large and small banks, regulators and IOSCO have created a costly and dangerous environment for smaller banks with higher funding costs. Fears of a reverse pyramid seem like a thinly veiled defense for a RFR that has allowed systemic risk to flourish during a critical interest rate cycle.

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CSRs fight for survival after ‘damning’ Iosco verdict ($) – Helen Bartholomew | 8/8/2023

Despite the July 3 IOSCO declaration that the two most widely used CSRs in US lending markets – Bloomberg’s short-term bank yield index (BSBY) and the American Financial Exchange’s (AFX) Ameribor – fell short of its principles for financial benchmarks, these benchmark administrators seem ready to address the concerns head on.
BW Take: The baseless report from IOSCO sans data or specific mention that Term SOFR also faces similar concerns, has only served to ignite the focus on CSRs and question the credibility of IOSCO and their complete absence of oversight authority. One person’s view is that this has always been about keeping focus on the chosen one (SOFR) despite the absence of an active, responsive and risk-efficient credit spread. Smart people are laughing.

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Bloomberg BSBY Bulletin – Underlying Volumes, Resiliency in Periods of Stress and Current Landscape

Bloomberg LP | 7/11/2023

Bloomberg’s bulletin provides a detailed performance overview of the Bloomberg Short-Term Bank Yield Index (BSBY) from the beginning of ’22 inclusive of historic and recent periods of market stress. Daily underlying volumes across published tenors and details of the waterfall process that can be utilized if liquidity is challenged are provided as is detail on the existing BSBY user and product landscape and its use across the lending markets.
BW Take: BSBYwatch was borne out of the recognition of the market’s need for a stable, credit-sensitive rate supported by the deep and robust transaction data that sets it far apart from Libor. This report highlights how BSBY is the correct reference rate for transactions where Risk Free Rates with the added cost of credit spreads and a restrictive swap market are simply inappropriate.

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BSBY/AMERIBOR – Not a Great July 4th (R) – Ed Ivey | 7/11/2023

IOSCO doesn’t have any actual legal authority. No one is going to jail for using BSBY or AMERIBOR – i.e., they cannot deem a rate “not IOSCO compliant” thereby outlawing its use. IOSCO sets principles, then someone like Bloomberg hires an auditor to review their rates and determine whether, in the opinion of the auditor, BSBY satisfies IOSCO’s principles. In fact, that is exactly what BSBY did do.
BW Take: A very good synopsis of where we are now with CSRs including the lack of IOSCO regulatory authority who incidentally have not provided any detail on the review that supported their recent decision on SOFR rate alternatives. IOSCO has set the stage for a practical debate on ALL Libor replacements and that’s a very good thing.

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Iosco deals hammer blow to BSBY, Ameribor ($) – Helen Bartholomew | 7/4/2023

The role of credit-sensitive rates in the post-Libor landscape has been thrown into doubt after the International Organization of Securities Commissions ruled that they do not comply with international benchmark standards.
BW Take: Despite an independent audit concluding BSBY’s compliance with the 19 core IOSCO principles, this latest ruling, while not a ban, will re-examine the makeup and volume underpinning CSRs and defined use cases.

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IOSCO Statement on Alternatives to USD Libor

The International Organization of Securities Commissions (IOSCO) | 7/3/2023

The IOSCO Review of Alternatives to USD Libor assessed the extent to which 4 benchmarks developed as potential substitutes for USD LIBOR – two credit sensitive rates and two Term SOFR rates, have implemented IOSCO’s 2013 Principles for Financial Benchmarks. In the report, varying degrees of vulnerability of concern with each rate’s implementation of the Principles were identified along with areas for improvement.
BW Take: A well-documented and data-rich credit sensitive rate seems essential to the health of the financial system. IOSCO are likely looking to refine the requirements and use cases to assure the market embraces a robust and stable solution.

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Curb use of dollar Libor alternatives to Fed rate, says watchdog

Reuters – Huw Jones | 7/3/2023

The use of four dollar-denominated alternatives to the now scrapped Libor interest rate need restrictions to avoid threatening financial stability, a global securities watchdog said on Monday.
BW Take: Concerns that the volume underpinning CSRs become vulnerable during periods of market stress seem to also apply to a bank’s ability to provide SOFR-based credit lines during times of stress.

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As Libor ends, credit-sensitive rates face day of reckoning ($) – Helen Bartholomew | 6/29/2023

On June 30th, trillions of dollars of cash and derivatives contracts are moving over to SOFR. Firms hoping to use credit-sensitive alternatives, such as BSBY and Ameribor, are still waiting for IOSCO to rule on whether these benchmarks comply with its standards, which are widely regarded as the minimum for regulated firms.
BW Take: To cut through the noise, IOSCO might want to consider the logic of why $900 billion in overnight transactions presents a better baseline reference rate than $600 billion across a diverse pool of maturities and transactions. To borrow from a famous quote, reports of BSBY presenting inverted pyramid concerns have been greatly exaggerated.

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Libor’s Demise Means No More Rigging, But Less Flexibility

Bloomberg ($) – Marcus Ashworth | 6/28/2023

A seminal event occurs at the end of this week: Dollar Libor will finally die. The big question is does its replacement, the Secured Overnight Financing Rate, make the global financial system safer, or just exposed to different risks?
BW Take: While revisiting the familiar shortcomings of SOFR, the key point made in this article is one that will continue to reverberate post June 30th: “The advantage of Libor was that it had multiple time-reference points stretching out to a year. A benchmark referenced solely to an overnight rate may not help the monetary system withstand stresses in times of illiquidity.”

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Euro Axi rate proposed as Euribor fallback ($) – Helen Bartholomew | 6/28/2023

A pair of UK academics have published a new methodology for building a euro-denominated credit-sensitive interest rate benchmark that could be used as a fallback for Euribor in cash and derivatives contracts.
BW Take: While Euribor has no confirmed cessation date, a Euro-AXI credit sensitive complex, supports the idea that a well-conceived credit sensitive index backed by significant, tangible transaction volume results in a benchmark with a forward-looking term structure whose underlying data aligns with bank funding costs. Obvious solutions for obvious challenges.

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Banks mull structured notes as term SOFR basis hedge ($) – Bernard Goyder | 6/21/2023

Banks are exploring how structured notes could be used to offload a basis risk between interest rate swaps referencing the US secured overnight financing rate (SOFR) and a term version of the benchmark, which is piling up on dealers’ balance sheets, can reveal.
BW Take: As the market approaches the end of Libor on June 30th, contractual fallbacks moving loans to SOFR will exasperate the growing basis between O/N and Term SOFR. Restricted use of basis swaps was a tepid approach which has led to the idea of a structured note to rein in growing basis exposure. A well-developed CSR market is not only needed to stop the madness but is infinitely more appropriate.

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Economic Issues To Watch In The Libor Transition

Law 360 (R) – Ioannis Gkatzimas, Ryan Leary and Musa Isani | 6/15/2023

This article discusses certain challenges in cases without a clear transition path, highlights the types of disputes that may materialize, and details how economic analysis will be crucial in helping litigators and their clients to navigate such challenges.
BW Take: Key to this analysis is the point that there is no one-size-fits-all approach to which Libor replacement rates are best in potential contract disputes. If lenders have a clear and substantiated preference for a credit sensitive rate that moved in alignment with credit events, it would make perfect economic sense to do so.

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Term SOFR Hedges: The Price of Perfection

Ballard Spahr LLC | 6/13/2023

As a result of the shift from LIBOR to the Secured Overnight Finance Rate (SOFR), borrowers who use interest rate swaps or options to manage interest rate risk may be asked to pay extra to maintain a hedge under which the interest rate on the swap is aligned with the interest rate on the debt. This alert discusses why the expense arose, what it represents, and how to analyze its worth.
BW Take: The best analysis of the challenges term SOFR presents to lending banks relative to the added cost structure that has resulted for borrowers. This outline makes a strong case for the clear market need for a credit sensitive rate like BSBY that checks many if not most boxes for efficiency, safety and cost.

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Regulators set to ban credit-sensitive Libor replacements

Intl. Financing Review (IFR) | 6/10/2023

Global regulators in the coming weeks are set to outlaw certain “credit-sensitive” alternative reference rates to US dollar Libor, according to sources familiar with the matter, dealing a blow to parts of the finance industry that had lobbied for greater choice when replacing the controversial benchmark.
BW Take: It’s less than clear if federal regulators have the jurisdiction to outlaw credit sensitive rates rather than provide a professional ‘opinion’ on alternatives to SOFR. Perhaps regulators should be examining the logic of fixed credit spread add-ons and the basis-risk that term SOFR restrictions have introduced to a market looking to reduce rather than contribute to systemic risk.

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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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LIBOR Benched as a Benchmark : Are You Ready for SOFR?

Squire Patton Boggs | 3/28/2023

The transition from Interbank Offered Rates (IBOR) to Alternative Risk Free Rates (RFR) has an impact on all financial and nonfinancial institutions having assets or liabilities that use the impacted floating reference rates.
BW Take: The statement, “Market participants whose financial contracts are governed by US law may wish to analyze whether such contracts can rely on the Adjustable Interest Rate (LIBOR) Act and the implementing regulations by the Federal Reserve Board and if so, whether such reliance is in their economic interest ” really opens the door for market participants to evaluate their options to determine is alternative credit sensitive rates present a more suitable option for certain structures.

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Term SOFR trading ban remains as easing talks collapse ($) – Bernard Goyder | 3/3/2023

Industry attempts to overturn an interdealer trading ban on derivatives linked to the forward-looking version of the secured overnight financing rate, or SOFR, appear to be dead in the water after discussions around a possible easing of trading restrictions reached an impasse.
BW Take: Putting this into context, trading restrictions and one-way term SOFR derivative flow has created widening basis exposure, banks become less willing/able to provide Term SOFR swap liquidity to clients, onerous level 3 accounting capital requirements, and clear signs that this can only get worse as we near final cessation on June 30th. BSBY and credit sensitive rates address conflicts between O/N and Term SOFR while adjusting for credit sensitivity in real time.

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Term SOFR gains ground in Asia

IFR – Chien Mi Wong | 2/24/2023

Less than five months before Libor is phased out on June 30, term SOFR is emerging as a preferred benchmark for US dollar loans in Asia given its similar characteristics to its predecessor.
BW Take: The obvious challenges of calculating and administering a backward looking compounded SOFR rate with end-of-period interest calculations have led to an increase in the adoption of Term SOFR across Asia. Despite this move to Term SOFR, concerns over license agreements and reporting obligations not to mention credit spread adjustments, could expand these options to include credit sensitive rates.

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Canada: Interest Rates Watch: What Will The Transition From Cdor To Corra Mean For Borrowers And Lenders? New Spread Adjustments, Compounded Corra In-Arrears Contingency Planning And More

Cassels LLP – Jennifer Wasylyk | 2/21/2023

With publication of the Canadian Dollar Offered Rate (CDOR) set to end in less than 18 months, with over $20 trillion of notional exposure across the Canadian financial system referencing CDOR, the transition from CDOR to a new reference rate will have wide-ranging implications.
BW Take: As Yogi once said, Deja Vu all over again seemingly applies here as the Canadian markets face similar circumstances transitioning from CDOR to CORRA. Similar to SOFR RFR adoption, challenges center around in-arrears rate conversion, demand for Term CORRA, and the variability and imprecise use of credit spread adjustments leaving market participants with a dearth of clarity and precision as markets once again replace apples with oranges.

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Alternative Reference Rates Committee (ARRC) meeting highlights – February 9, 2023

Alternative Reference Rates Committee | 2/15/2023

Highlights from the Alternative Reference Rates Committee (ARRC) meeting on February 9, 2023 provide charts detailing the data from cash and derivatives markets detailing the strong momentum in the transition.
BW Take: Despite the continued growth of basis risk on the balance sheets of banks supporting Term SOFR activity, the term rate task force have not moved away from their initial guidance on best practices recommendations regarding the restricted use of term SOFR. These restrictions will likely serve to accelerate and encourage adoption of more risk-aligned credit sensitive rates such as BSBY.

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NY Fed paper warns of systemic risks from SOFR credit lines. Stress tests need to account for credit facilities being “drawn to the limit”, says Stanford’s Duffie ($) – Helen Bartholomew | 2/8/2023

Regulatory stress tests may need to be updated to account for the acute drawdown risks faced by banks that offer committed credit facilities linked to the secured overnight financing rate, or SOFR, according to a recent staff paper from the Federal Reserve Bank of New York.
BW Take: The expression “everything is fine until it isn’t” would seem to apply to the assumption that a risk-free rate becomes suitable replacement for all-things Libor. As we have said before, a risk-free rate does not broadly reflect a bank’s true cost of funding and this paper examines the impact to SOFR credit lines during times of stress. This shift in terms of line drawing under stressed markets versus normal markets is what Stanford’s Duffie refers to as systemic stress and argues quite well for further examination of credit sensitive rates.

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Term SOFR and BSBY Volumes in 2022

Clarus Financial Technology – Amir Khwaja | 2/7/2023

Having analyzed Term SOFR and BSBY Swap Volumes in April 2022 and new developments in Term SOFR in November 2022, this latest analysis examines how trade volumes in these reference indices developed through January 2023.
BW Take: The party is just getting started. Although Term SOFR accounts for <10% of overall SOFR volume with cap and floor volume representing anywhere from 10-20% of monthly gross notional, over 80% of Institutional loans and CLOs remain Libor-based and must transition over just four and half months. Term SOFR and BSBY adoption rates will likely see some significant activity and bear close scrutiny in the months ahead.

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Ex-Citi Analyst Who Exposed Libor Takes Aim at Its Successor

Bloomberg ($) – William Shaw / Alex Harris | 1/31/2023

Over a decade ago, Scott Peng was one of the earliest voices to call out the scandal-ridden London interbank offered rate. Now, he’s sounding the alarm over its successor. Peng says guidelines designed to limit who can use derivatives tied to the Secured Overnight Financing Rate are inadvertently heaping risk onto banks’ balance sheets, echoing warnings from TD Securities and JPMorgan Chase & Co. Left unchecked, he says, it could pose a significant risk to the smooth functioning of financial markets.
BW Take: As adoption of Term SOFR grows, mounting basis-risk facing banks builds as regulators limit the market’s ability to rely on term benchmarks that lack significant underlying liquidity. Peng joins a chorus of banks such as JPM and TD who have called out accumulating bank basis risk as well as variable costs to borrowers in the form of liquidity premiums & credit spread adjustments that would seem to support the merits of a credit aligned rate such as BSBY.

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Final Rule Implementing Libor Act Confirms Use of CME Term SOFR Plus CSA for Tough Legacy Contracts

Akin Gump Strauss Hauer & Feld LLP | 1/17/2023

On 12/16/2022, the Federal Reserve Board adopted the final rule implementing the Adjustable Interest Rate (LIBOR) Act which establishes benchmark replacements for U.S. governed contracts that reference Libor but do not specify the use of a replacement benchmark rate following the cessation of Libor on 6/30/2023. Tough legacy contracts will migrate to Term SOFR based rates, with applicable credit spread adjustments (CSAs). This is a welcome development for collateralized loan obligation (CLO) managers with legacy CLO indentures that would otherwise require noteholder consents to effect a benchmark replacement.
BW Take: The final rule of the Libor Act will assure that tough legacy contracts transition to Term SOFR. As these contracts adopt Term SOFR plus a credit spread adjustment of 0.26161%, comparisons to credit sensitive rates such as BSBY and Ameribor preset compelling economics.

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Bank Funding Risk, Reference Rates, and Credit Supply

The New York Fed | 12/31/2022

Corporate credit lines are drawn more heavily when funding markets are stressed thereby elevating bank funding costs and inefficiently dampening credit supply due to the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid to CSR’s (Libor) and the transition to risk-free reference rates. The adverse impact on credit supply is offset if the majority of drawdowns are left on deposit at the same bank as seen by some of the largest banks during the COVID-19 shock.
BW Take: Looking at the profound changes to bank lending resulting from the transition of a credit sensitive rate (Libor) to a risk free rate (SOFR), banks have adjusted to an environment where RFRs that fall under periods of stress see bank funding costs trend in the opposite direction leading to heavier drawdowns on credit lines during periods of market stress. While fixed CSAs can mitigate some of this risk, a credit sensitive rate such as BSBY provides a far more risk-efficient means of aligning the two and reducing systematic risk.

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FSB Offers LIBOR Transition Update, Warns of ‘Residual Risks’

REGULATION ASIA ($) – Manesh Samtani | 12/20/2022

Regulators continue to express concerns that the use of Term SOFR and credit sensitive rates could draw away liquidity from the overnight SOFR derivatives markets
BW Take: Reg Asia provides a tight synopsis of the Dec. 16th FSB Libor Transition Progress Report detailing adoption rates and ongoing challenges. In addressing the Catch-22 of increased Term SOFR adoption, it is well understood that the use of Term SOFR for derivatives could lead to a decline in the O/N SOFR derivatives markets on which Term SOFR is based. To address these concerns, IOSCO is undertaking a review of Term SOFR and credit sensitive rates to assess whether and/or how CME Term SOFR; IBA Term SOFR; Ameribor; and Bloomberg Short-Term Bank Yield Index (BSBY) align with IOSCO principles.

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ARRC’s trivial fight over term SOFR use ($) – Helen Bartholomew | 12/19/2022

On November 8, Toyota issued a $1.5 billion auto loan securitisation with a $293 million floating rate tranche linked to a term version of the secured overnight financing rate, or SOFR. It seemed innocuous enough, but the deal rankled members of the Alternative Reference Rates Committee, the Federal Reserve-backed group tasked with steering US markets away from Libor, which had previously advised against the use of term SOFR in securitisations of fixed rate assets such as auto loans…
BW Take: As we revisit the one sided market restrictions for Term SOFR and the origin of usage restrictions, we must also consider the simple point that the ARRC has no actual powers of enforcement. With data licenses for CME term SOFR exceeding 7,000 across more than 1,800 firms, it’s hard to imagine that something will not give including the potential that frustration moves segments of the market away from SOFR toward credit sensitive rates.

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Progress Report on LIBOR and Other Benchmarks Transition Issues: Reaching the finishing line. . .

Financial Stability Board | 12/16/2022

Reaching the finishing line of LIBOR transition and securing robust reference rates for the future
BW Take: To properly consider the merits of RFR alternatives in lending space against current adoption data, one must consider the opacity of regulatory approval, necessary system and technical support and the willingness of lenders to table alternatives against the backdrop of credit spread adjustments and other add-ons. As education, awareness and regulatory clarity progress, credit sensitive rates such as BSBY will likely gain much-needed evaluation.

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FSOC (Financial Stability Oversight Council) Annual Report

FSOC | 12/16/2022

In the Financial Market Structure review in FSOC’s annual report, Credit-sensitive alternatives to SOFR, have seen little relative adoption by market participants. Although the Council has continued to advise lenders, borrowers, and other market participants to consider SOFR-based rates and to conduct a comprehensive evaluation before adopting any alternative rate, warning that rates based on small transaction volumes, could introduce risks. While banks will not be criticized for choosing a different rate, a number of Council members have emphasized concerns with such credit-sensitive rates being referenced in capital or derivatives markets.
BW Take: The real question is if a RFR in arrears based almost solely on overnight transaction volume and term SOFR derivative restrictions provide market participants with less systemic risk than a CSR with a legitimate term structure calculated against a broad set of transaction volume. As market participants gain the ability to evaluate these risks, the need for alternative rates for certain transactions seem obvious.

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As SOFR Deadline Looms, FCA Proposes Extensions for ‘Synthetic’ Approach to Legacy USD LIBOR Contracts

Ballard Spahr LLC | 12/5/2022

The UK Financial Conduct Authority (FCA) on November 23 published its Consultation on ‘Synthetic’ U.S. Dollar LIBOR to advance some synthetic applications of USD LIBOR from June 30, 2023, until September 30, 2024. If the Consultation is adopted, here are some issues to consider when determining whether outstanding “tough legacy” USD LIBOR contracts will convert to the Secured Overnight Financing Rate (SOFR) or a synthetic USD LIBOR rate.
BW Take: A very good synopsis of the FCA Consultation on ‘synthetic’ US dollar LIBOR and feedback to CP22/11 by Ballard Spahr While Libor for contracts referencing US law will convert to SOFR on 30Jun2023, there are significant contracts referencing UK and other non-US law that will not transition via the US Adjustable Rate Libor Act. For these contracts, the FCA are proposing that a synthetic derivation of Libor based on Term SOFR plus appropriate spread adjustments.

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Three Critical Problems AXI Solves for Banks

Marcus Burnett | 12/1/2022

The article discusses three three of the critical challenges facing banks as they replace Libor with a risk free rate.
BW Take: Provisioning credit is among the chief functions of banking and speaks to the fundamental way financial instruments are created, funds are invested, demand is accommodated and risk is managed. Perhaps one day, we’ll look back at this period in history and understand how the move from Libor to a risk free rate did not seemingly acknowledge these basic principles with a more logical approach. As we see with alternative reference rates like BSBY, Marcus Burnett, in highlighting these inefficiencies, discusses the Invesco USD-AXI credit spread index supplement as one solution to an obvious set of challenges.

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Term SOFR and Term SONIA: A Return to Term Reference Rates in European Fund Financing Transactions?

Mayer Brown | 11/30/2022

Now that the dust has (almost!) settled on issues relating to LIBOR cessation in fund financing transactions (and the lending markets more generally), we are increasingly seeing market participants turning their attention to the rates now being used for financing transactions involving currencies which were previously funded on the basis of LIBOR.
BW Take: The realization that “recommendations” of the £RFR Working Group do not provide a regulatory impediment to European market participants seeking to finance US dollar transactions on the basis of Term SOFR, has put a degree of focus on potential use cases where a Term SONIA rate may be appropriate. Could CSRs be next to follow?

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Keynote of Chairman Rostin Behnam at Bloomberg’s The Final Chapter for USD LIBOR

CFTC Chairman – Rostin Behnam | 11/17/2022

Chairman Behnam provides a detailed overview on the Libor transition, the efforts that have gotten us to this point and the challenges ahead as we approach the drop-dead cessation date of June 30, 2023.
BW Take: In contrasting O/N & Term SOFR, Behnam acknowledges the challenges of the two disparate rates but makes no mention of the growing basis risks facing banks. “Use of Term SOFR rates in derivatives and most other cash markets must be limited to avoid the types of problems created by LIBOR. Most recently, a rather large securitization that referenced Term SOFR drew concern. If this practice were to begin trending, it would increase the use of Term SOFR derivatives, which could lead to a decline in the overnight SOFR derivatives markets on which Term SOFR is based. This outcome would be the antithesis of what the official sector and market participants have worked so hard to achieve” As banks struggle to manage mounting basis risk and borrowers begin to resist Term SOFR Liquidity Spreads AND Credit Spread Adjustments, BSBY is beginning to gain legitimate momentum.

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Warby Parker Inc.: (Form 8-K)

Market Screener | 10/4/2022

Warby Parker Inc., a Delaware public benefit corporation, and Warby Parker Retail, Inc., entered into a Credit Agreement (the “Credit Agreement”) with the lenders from Comerica Bank, as Administrative Agent (the “Agent”), The Credit Agreement provides for a revolving credit facility with borrowing capacity up to $100,000,000 at any time outstanding. Borrowings under the Credit Agreement are secured and will bear interest at a rate equal to, either a base rate determined by reference to the highest of (i) the federal funds rate plus 1.00% per annum, (ii) the rate last announced by the Agent as its prime rate and (iii) the Bloomberg Short-Term Bank Yield Index rate (“BSBY Rate”) for a one month tenor on such date plus 1.00% per annum
BW Take: Warby Parker revolving credit facility incorporates BSBY as an optional funding rate.

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No Way CSA

Ropes & Gray LLP | 9/22/2022

Recent changes in LIBOR and SOFR levels have upended a multi-year conversation between borrowers and lenders about what credit spread adjustment, if any, is appropriate to be added to SOFR-based interest rates when credits switch from LIBOR to SOFR. LIBOR and SOFR are fundamentally different reference rates because LIBOR is a credit-sensitive rate, which includes the cost of funds to banks, and SOFR is a risk-free rate tied to the cost of borrowing against treasuries.
BW Take: Its difficult to deny how the optionality and variability of a credit spread adjustment (CSA) introduces systemic risk and how rising rates are contributing to the pressure on lenders to reduce or remove CSAs completely. The core principles rooted in the origin of Libor aligned market exposures with the variable funding costs of the lender and not against some arbitrary fixed-rate estimate in the form of a CSA. Adopting a credit sensitive rate backed by material and relevant transaction data would seemingly benefit both lenders and borrowers.

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SOFR swap basis could pose ‘systemic risk’

RISK ($) – Helen Bartholomew | 9/19/2022

The ban on interdealer trading of term SOFR derivatives is causing prices to deviate sharply from instruments linked to the compounded-in-arrears version of the rate – an anomaly that, if left unchecked, could pose a systemic risk to swap dealers, a senior market risk manager has warned.
BW Take: Replacing USD Libor with a rate broadly based on overnight transactions sans a forward looking term structure or credit sensitivity has created quite the quagmire. By introducing a restricted-use Term SOFR rate to address the needs of the loan market, the resulting basis risk can only be expected to widen going forward. The call to ease term SOFR trading restrictions raises additional concerns while doing little to mitigate the risk it has created. A multi-rate environment with SOFR swaps satisfying the core swaps market and a well-conceived forward looking credit sensitive rate such as BSBY satisfying the core lending space presents an elegant solution to address legitimate concerns of escalating systemic risk.

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Broadway Unveils Trading Support for Eris BSBY Swap Futures

Markets Media | 9/14/2022

Eris BSBY swap futures present a valuable liquidity channel as more clients become aware of the efficiencies of credit sensitive rate lending
BW Take: Broadway Introduces Trading Support for Eris BSBY Swap Futures New functionality allows clients to seamlessly manage credit risk as Libor use declines.

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 SOFR: Coming in for Landing

Vinson & Elkins LLP | 8/25/2022

With the last U.S. dollar (“USD”) LIBOR tenors being discontinued on June 30, 2023, the time has come for borrowers and lenders (and lessees and lessors) to think about replacing LIBOR in their existing facilities.
BW Take: Do CAS’s make economic sense, are they being negotiated and is it even clear that they exist? As key dates to move existing facilities away from Libor approach, a thorough evaluation of the merits of SOFR + Margin + CAS (credit adjustment spread) present come compelling arguments to consider credit sensitive rates such BSBY and Ameribor.

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Why the debate over credit sensitive rates won’t go away…

Martialis Consulting – Ross Beaney | 8/17/2022

It’s not a debate being played out around weekend barbeques, and it’s not likely to gain regular billing on 6 o’clock bulletins, but the question of whether finance needs credit sensitive benchmarks is one we’ve looked at many times – and yes, debated. Ross Beaney examines a rather obvious pitfall that seems likely to arise if corporate finance doesn’t settle on a credit sensitive lending solution.
BW Take: In one of the more thoughtful, data-driven analysis of the CSR debate, this analysis of a Wharton research paper on Libor vs. SOFR loans examines the material hypothetical cost SOFR-based lending would have incurred during the global financial crisis. While many factors such as current bank funding costs and the addition of arbitrary and often costly CSAs mitigate this exposure, it is difficult to deny the efficiencies of a CSR and why dynamic credit sensitivity alignment has historically been the cornerstone of accurate and efficient funding methodologies.

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Benchmark Rate SOFR Has Caught On. But One Version Is Costing Companies More to Hedge

WSJ ($) – Mark Maurer | 8/11/2022

A successor to the tainted Libor rate, SOFR is gaining wide acceptance. Its term version can help businesses forecast cash, but it can cost more to hedge than the overnight rate due to restrictions on banks
BW Take: Although the forward-looking Term SOFR rate addressed some of the biggest shortcomings of O/N SOFR in arrears, trading restrictions have created higher hedging costs forcing many to re-evaluate Term SOFR as the best option. Factoring in the addition of arbitrary credit spread adjustments (CSRs), further distances SOFR from being a singular replacement for the breadth of transactions priced off of Libor. In the lending space, credit sensitive rates such as Bloomberg’s BSBY, impart both a term structure and a dynamic credit sensitive spread providing a elegant solution to an obvious challenge.

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Henrard on the remaining challenges for Libor transition ($) – Mauro Cesa | 8/8/2022

As Libor benchmarks are replaced by compounded overnight rates, the pricing and risk management of legacy contracts can become increasingly challenging. Marc Henrard, managing partner at MurisQ Advisory explains that legacy vanilla swaptions have now become exotic products, thanks to a fallback approach that introduces new layers of complexity into cash-settled instruments. A swap, a simple series of multiple Libor payments, needs to be replaced by functions of overnight indexed swap (OIS) rates that account for different payment frequencies, and that is not straightforward.
BW Take: In addressing the remaining challenges of the Libor transition, Henrard concedes that adopting term SOFR in the US lending market is not a technically robust measure because the futures-based methodology used to calculate term SOFR is derived from average values realized during the day preventing it from being perfectly hedged.

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Corsair Gaming amends credit agreement to BSBY

MarketScreener | 8/4/2022

On June 30, 2022, Corsair Gaming Inc. entered into a First Amendment of the Credit Agreement which among other changes resulted in the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) being utilized as a replacement rate for LIBOR. Consequently, following the First Amendment, the Term Loan and Revolving Facility will each bear interest at our election at either (a) BSBY plus a percentage spread (ranging from 1.25% to 2.25%) based on our total net leverage ratio, or (b) the base rate as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month BSBY plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.25%) based on our net leverage ratio.

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Edgewell Personal Care Company

Market Screener | 8/4/2022

In amending their Master Accounts Receivable Purchase Agreement between Edgewell Personal Care, LLC and MUFG Bank, LTD., they increased the maximum receivables sold amount under the Accounts Receivable Facility to $180.0 from $150.0 and amended the pricing index used to determine the purchase price for subject receivables from LIBOR to the Bloomberg Short Term Bank Yield Index (“BSBY”). As of June 30, 2022, the discount rate used to determine the purchase price for the subject receivables shall be based upon BSBY plus a margin applicable to the specified obligor.

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CoreCivic Amends Credit Agreement

CoreCivic, Inc. | 8/2/2022

The New Bank Credit Facility matures in May 2026 replacing an existing Bank Credit Facility scheduled to expire in April 2023. Based on our current total leverage ratio, loans under the New Bank Credit Facility currently bear interest at a base rate plus a margin of 2.25% or at the Bloomberg Short-Term Bank Yield Index (BSBY) rate plus a margin of 3.25%.
BW Take: Credit sensitive rates such as BSBY are gaining momentum as clients refinance existing credit lines to reflect real-world market dynamics.

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ISDA SwapsInfo Second Quarter and first half of 2022 Review: Summary

ISDA | 8/2/2022

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

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BSBY as defined by Investopedia

Investopedia – Adam Hayes | 7/31/2022

The Bloomberg Short-Term Bank Yield Index (BSBY) is a series of short-term interest rate benchmarks created in 2021 and published by Bloomberg LP. The BSBY provides a series of credit-sensitive reference rates that incorporate bank credit spreads and it defines a forward term structure. BSBY also seeks to measure the average yields at which large global banks access short-term senior unsecured wholesale funding.
BW Take: A very comprehensive overview of the origin and core structure of BSBY laid out in a very clear and concise format.

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Invesco Indexing and SOFR Academy announce official launch of the Invesco USD Across-the-Curve Credit Spread Indices (AXI)

Invesco LTD/SOFR Academy, Inc. | 7/25/2022

Invesco Indexing LLC, an independent index provider owned by Invesco, Ltd. (NYSE: IVZ), and SOFR Academy, Inc., a digital education and data provider, announce the official launch of the first-of-their-kind USD Across-the-Curve Credit Spread Indices (“AXI”) and USD Financial Conditions Credit Spread Indices (“FXI”).
BW Take: The AXI and FXI credit spread indices present an additional approach to address the need for a more logical alignment between lending rates and funding costs. These indices present a credit sensitive spread supplement to SOFR whereas BSBY is a fully vetted credit sensitive rate created by transactional market activity. The momentum building in this space address the challenges of implementing arbitrary credit spread adjustments void of consensus or standards. The added clarity these rate index supplements provide will hopefully add structure providing market participants with the ability to make more informed choices.

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Buy Side Urged to Prepare for Libor End-Date

Traders Magazine – Anna Lyudvig | 7/21/2022

To address the challenges and risks associated with the LIBOR cessation, asset managers should continue to update their plans that were hopefully in place for the year-end transition, according to Chris Fedele, Vice President, Global Regulatory Strategy at Broadridge.
BW Take: As clients prepare for the final cessation of Libor in June of ’23, there are a number of key considerations for clients that extend beyond fallbacks to a full accountability of end to end exposures, operational processes, risk, and valuation. Despite the regulatory guidance to transition Libor exposures to SOFR, recent federal legislation has allowed clients to further evaluate the potential benefits of credit sensitive rates such as Ameribor and BSBY for certain exposures.

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The endgame for Basis Swaps?

Clarus Financial Technology – Amir Khwaja | 7/20/2022

Basis Swaps are used to hedge or trade the basis spread between the reference indices or Libor tenors and are widely used, particularly in the dealer market to hedge client activity in the less liquid reference index or tenor. With the demise of IBORs, there will naturally be less basis spreads in most currencies. Not great for brokers and dealers, as less products to trade and make markets in, but perhaps better for customers as a simplification of interest rate hedging.
BW Take: A hugely impactful and oft debated topic that has resulted in the move to risk free rates is the dramatic reduction of basis swap trading activity attributable to reductions in basis spreads within risk free rates. Additionally, daily SOFR fixes allow overlapping portions of an exposure and its hedging instrument to match requiring less trading to manage and hedge reset risk. One unexpected byproduct of this newfound market efficiency could be the resulting impact to liquidity resulting from the large-scale decline in these types of trading activity.

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Alternative Reference Rates Committee Meeting Readout

ARRC | 7/13/2022

Topics discussed included an update on recent ARRC releases including the Legacy LIBOR Playbook, CME Group’s SOFR First for Options initiative, momentum towards the Secured Overnight Financing Rate (SOFR), results from the latest sentiment survey of ARRC members, and ARRC working group updates.
BW Take: Despite the progress being made on the transition to SOFR, lending banks face a significant quagmire with the escalating SOFR/Term SOFR basis and the call for Term SOFR restrictions to be revisited. The Term Rate Task Force has been discussing participants’ views around term SOFR derivatives and the overnight SOFR/term SOFR basis, including clearing, capital, and accounting considerations but are not expected to materially relax the substance of the ARRC’s best practice recommendations regarding scope of use for the term SOFR rate.

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Clarus – Amir Khwaja | 7/12/2022

A very comprehensive view of the Libor transition examining global CCP volumes and market share in interest rate derivatives via the Clarus CCPView database.

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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*: Synthetic 3-Month USD Libor (US0003M Index)

For more information: ICE LIBOR (

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)