BSBY Swaps & Futures Volume
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Lastest BSBY News
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 $20 trillion of notional exposure across the Canadian financial system referencing CDOR, the transition from CDOR to a new reference rate will have wide-ranging implications.
BW Take: As Yogi once said, Deja Vu all over again seemingly applies here as the Canadian markets face similar circumstances transitioning from CDOR to CORRA. Similar to SOFR RFR adoption, challenges center around in-arrears rate conversion, demand for Term CORRA, and the variability and imprecise use of credit spread adjustments leaving market participants with a dearth of clarity and precision as markets once again replace apples with oranges.
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Alternative Reference Rates Committee (ARRC) meeting highlights – February 9, 2023
Alternative Reference Rates Committee | 2/15/2023
Highlights from the Alternative Reference Rates Committee (ARRC) meeting on February 9, 2023 provide charts detailing the data from cash and derivatives markets detailing the strong momentum in the transition.
BW Take: Despite the continued growth of basis risk on the balance sheets of banks supporting Term SOFR activity, the term rate task force have not moved away from their initial guidance on best practices recommendations regarding the restricted use of term SOFR. These restrictions will likely serve to accelerate and encourage adoption of more risk-aligned credit sensitive rates such as BSBY.
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NY Fed paper warns of systemic risks from SOFR credit lines. Stress tests need to account for credit facilities being “drawn to the limit”, says Stanford’s Duffie
Risk.net ($) – 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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*Data limited to syndicated loans, as bilateral loan activity is less readily available as of 27-Mar-2023
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