Lastest BSBY News
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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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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BSBY Syndicated
Loan Scorecard
150
Loan Count
$
2000000000000
Loan Notional Totals
*Data limited to syndicated loans, as bilateral loan activity is less readily available as of 28-Aug-2023
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