Latest BSBY News
Term SOFR trading ban remains as easing talks collapse
Risk.net ($) – 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 $20 trillion of notional exposure across the Canadian financial system referencing CDOR, the transition from CDOR to a new reference rate will have wide-ranging implications.
BW Take: As Yogi once said, Deja Vu all over again seemingly applies here as the Canadian markets face similar circumstances transitioning from CDOR to CORRA. Similar to SOFR RFR adoption, challenges center around in-arrears rate conversion, demand for Term CORRA, and the variability and imprecise use of credit spread adjustments leaving market participants with a dearth of clarity and precision as markets once again replace apples with oranges.
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Alternative Reference Rates Committee (ARRC) meeting highlights – February 9, 2023
Alternative Reference Rates Committee | 2/15/2023
Highlights from the Alternative Reference Rates Committee (ARRC) meeting on February 9, 2023 provide charts detailing the data from cash and derivatives markets detailing the strong momentum in the transition.
BW Take: Despite the continued growth of basis risk on the balance sheets of banks supporting Term SOFR activity, the term rate task force have not moved away from their initial guidance on best practices recommendations regarding the restricted use of term SOFR. These restrictions will likely serve to accelerate and encourage adoption of more risk-aligned credit sensitive rates such as BSBY.
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NY Fed paper warns of systemic risks from SOFR credit lines. Stress tests need to account for credit facilities being “drawn to the limit”, says Stanford’s Duffie
Risk.net ($) – 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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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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BSBY Syndicated
Loan Scorecard
as of 18-Mar-2022
CME Eris BSBY Launch
Expected Launch
April 10, 2022
(Subject to Regulatory Review)
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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 ≫