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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ARRC Publishes LIBOR Legacy Playbook

The Alternative Reference Rate Committee | 7/11/2022

The Alternative Reference Rates Committee (the “ARRC”) published a “Playbook” to assist market participants in transitioning their legacy LIBOR contracts to an alternative rate by June 30, 2023. The Playbook is primarily focused on legacy cash products, which the ARRC estimates will total approximately $5 trillion.
BW Take: A much-needed step by the ARRC to encourage market participants to conduct a thorough assessment of their Libor holdings as it relates to trigger events, fallback details, client communication, governing law and operational implementation while securing all necessary resources. With the end of Libor less than a year away, the challenges resulting from the sheer scale and variability of legacy Libor contracts cannot be ignored.

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ARRC reconvenes task force to evaluate term SOFR curbs ($) – Helen Bartholomew | 7/7/2022

The Federal Reserve-backed industry group charged with steering US markets away from Libor has reconvened a task force of buy-side and sell-side derivatives users to evaluate whether strict curbs on trading a forward-looking version of the secured overnight financing rate should be loosened. The debate is widely expected to unlock broader use of the benchmark in derivatives, though officials are tempering hopes for a full-scale opening of the floodgates.
BW Take: As the market struggles with restrictions on trading term SOFR and the basis risk that has resulted, concerns of creating an inverted pyramid seem to be exaggerated and could very well lead to central clearing of term SOFR swaps and the creation of an interdealer market. The magnitude of challenges highlighted in the Risk article raises the need to further analyze the merits of an ecosystem of forward-looking credit sensitive instruments to support loan issuance and associated hedges.

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U.S.-Dollar Libor Transition Enters Critical Phase for Leveraged Loan Market

Reuters ($) | 6/30/2022

The one-year countdown began on Thursday to the end of the publication of the tarnished London Interbank Offer Rate, or Libor, for existing U.S. dollar-denominated contracts, and volatile market conditions have delayed the switch to new rates for some market participants.
BW Take: With 87.8% of leveraged loans still linked to Libor, the transition to alternative rates will occur over a very concentrated time period with lenders assessing how an arbitrary credit spread adjustment to SOFR could underprice risk if there are unexpected periods of credit stress.

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Libor the Final Countdown

LSTA – Meredith Coffey EVP – Research, Regulatory, CLO | 6/29/2022

It’s T-12 (months) for LIBOR. LSTA members hopefully know that LIBOR will finally and inexorably cease on June 30, 2023. As existing contracts expire around that date, all legacy loans will need to transition to their replacement rate. So, with just 12 months remaining, how has the LIBOR transition gone thus far – and what are the remaining major issues?
BW Take: Despite the dominant use of term SOFR for new loan originations in 2022, the reality is that over $4 trillion of outstanding loans have not yet transitioned off Libor. The magnitude of this transition will likely reignite the merits of lending against a risk-free-rate coupled with the added complexity of the market’s inconsistent adoption of a CSA convention relative to a credit-sensitive rate such as BSBY or Ameribor.

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Calls grow to ease restrictions on term SOFR derivatives ($) – Natasha Rega-Jones | 6/22/2022

Market participants are calling for strict curbs on interdealer trading in term SOFR derivatives to be eased as part of a final push to transition the interest rate market away from US dollar Libor ahead of its ultimate cessation next June. Term SOFR – the forward-looking version of the secured overnight financing rate – has been widely adopted in the US loan market.
BW Take: Term SOFR trading “guidelines” have created restrictions and thus, contributed to the formation of a one-sided term SOFR market impeding how dealers hedge exposure. Given the wide-ranging outcomes that could result from a decision to amend these guidelines, BSBY and other CSRs present a very workable alternative reference rate with a clear term structure coupled with the added benefit of a dynamic credit spread that adjusts during periods of economic stress.

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Bloomberg BSBY Consultation – Trimming Methodology (June 2022)

Bloomberg LLC | 6/15/2022

As interest rates have risen steadily over the course of this year, the BSBY index team observed that the BSBY 1M tenor, which is calculated using input data with a days to maturity range of 6-45 days, tracked more closely to the significant trading activity at the front end of the curve as compared to the input data closer to and around the 30 day tenor point, especially during periods within 30 days of a rate increase.
BW Take: In an effort to improve how 1M BSBY rates respond to volatility and rate changes, Bloomberg’s recently released BSBY methodology consultation has proposed adjustments to outlier trimming for BSBY 1M by subdividing the DTM corridors for each tenor (ex O/N) into three buckets and then eliminating the top and bottom 25% at the sub-corridor level.

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ABA supports FASB action to aid Libor transition for derivatives markets

American Bankers Association | 6/7/2022

As the derivatives market works to transition away from the London Interbank Offered rate, the American Bankers Association this week wrote to the Financial Accounting Standards Board in support of a deferral of the sunset date for the transition relief provided by FASB and the expansion of the definition of the Secured Overnight Financing Rate, or SOFR, to include term SOFR as eligible to be designated a benchmark index for hedge accounting purposes.
BW Take: In their recommendations to FASB to add Term SOFR as a benchmark index for hedge accounting purposes, the ABA also urged consideration to include the Bloomberg Short-Term Bank Yield Index (BSBY) as well given its the developing role in bank lending space and the resulting need for fair value hedge accounting to be applied to loans hedged with BSBY aligning with accounting and risk management practices.

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Why the Shift in Benchmark Rates Could Hurt Banks

Urban Jermann – Professor of International Finance and Capital Markets – The Wharton School – University of Pennsylvania | 6/6/2022

Bank regulators in the U.S. have steadfastly guided the transition to SOFR (Secured Overnight Financing Rate) as a superior alternative to the scandal-tarred LIBOR, or the London Interbank Offered Rate. But SOFR may not be the golden alternative it is touted to be. In times of crises such as recessions, SOFR doesn’t offer banks the cushion they got from LIBOR to price in the additional risk they take on.
BW Take: Professor Jermann takes a very clear and fundamental view on the benefits that credit sensitive rates have contributed to the lending space during periods of market stress. Referencing data from the 2007-09 credit crises period against a hypothetical SOFR rate would have added material risk and loss to an already dire situation.

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Market Screener | 6/1/2022

Carriage Services, Inc. entered into a second amendment and commitment increase to its first amended and restated credit agreement with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Agreement Amendment provides an increase to the Revolving Credit Commitments from $200.0 million to $250.0 million in the aggregate; (ii) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (iii) the establishment of the Bloomberg Short-Term Bank Yield Index Rate (BSBY) as a benchmark rate and the removal of LIBOR from the Amended Credit Agreement.
BW Take: Carriage Systems restructures their revolving credit facility moving from Libor to another credit sensitive rate, Bloomberg’s Short Term Bank Yield Index (BSBY).

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Market Screener | 5/25/2022

The Amendment increases the Revolving Credit Facility commitments from $250 million to $450 million. The Amendment also establishes that the interest on outstanding borrowings starting on the next reset date and any new borrowings under the Amendment (other than swingline loans) will accrue, at the Company’s option, at (a) the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the Applicable Rate (as defined in the Credit Agreement, approximately 1.00% to 2.00% per annum depending on various factors) or (b) for U.S. Dollar denominated loans, the base rate (which is the highest of (i) the federal funds rate plus 0.50%, (ii) the Bank of America, N.A. prime rate, (iii) the one month BSBY adjusted daily plus 1.00% and (iv) 1.00%).
BW Take: Referencing BSBY for the restructuring of their $450 million revolving credit facility, Benchmark Electronics joins the growing list of lending agreements selecting BSBY as the preferred credit sensitive rate to replace Libor.
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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.

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The Bloomberg Short-term Bank Yield Index (BSBY): A year in the life

Bloomberg Professional Services | 5/13/2022

The Bloomberg Short-term Bank Yield Index, or BSBY as it’s often called, has had an eventful and interesting year since its official launch in March 2021. BSBY was introduced to the market when it became clear that banks and other financial institutions wanted a USD LIBOR alternative that reflected the cost of bank funding.
BW Take: Once all global USD lending has finally transitioned away from USD Libor to SOFR, asset-liability managers (ALM) will face having to stress-test the risks between their SOFR assets and their liabilities. And while Libor is ending, it’s hard to imagine all credit and liquidity risks also cease with Libor. So how will ALM hedge the exposure when stress-tests report exposure between SOFR based assets and non-SOFR liabilities? The Bloomberg LP Short Term Bank Yield and recently listed Eris BSBY Swap Futures, a CME Group Interest Rates complex, offers one such solution.

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Factset – Yudi Bai | 5/12/2022

With the cessation date of the remaining USD LIBOR (London Interbank Offered Rate) settings a year away, it is surprising to see how much work is yet to be done and how different market players are reacting to USD LIBOR and its successor, the Secured Overnight Financing Rate (SOFR). While industry participants push for the development of a SOFR-linked derivatives market, the bond market is discussed less frequently. However, debt issuance is also a critical market indicator when evaluating a benchmark rate like SOFR.
BW Take: In the debt issuance space, interest rate uncertainty, inflation and concern over long term bond liquidity have contributed to a concentration of short-term issuance based on SOFR. Adding in the structural challenges of term SOFR and the availability of alternative forward looking rates such as BSBY, expectations of a deeper SOFR FRN bond market may in fact become far more fragmented and complex.

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Focus Turned Home: LIBOR Cessation Completion for Multi-Currency Facilities and the USD LIBOR Remediation Status

Taft Stettinius & Hollister LLP | 5/3/2022

Taft discusses some of the challenges and variability for Libor remediation across multi-currency credit facilities in the US
BW Take: In reviewing the status of Libor remediation, a number of SOFR derivatives being used across certain markets are discussed including Daily Simple SOFR, Term SOFR, Average SOFR, and Compounded SOFR in Arrears along with the many risk and operational challenges each presents. Also mentioned are credit sensitive rates like BSBY as alternative benchmarks that account and attempt to measure the credit risk component of unsecured borrowing as well as the lender’s cost of funds as a factor in determining such rates.

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A second term SOFR: help or hindrance? ($) – Helen Bartholomew | 4/29/2022

Ice Benchmark Administration launched its term version of the secured overnight financing rate in March, citing market need for a back-up to CME’s term SOFR. But some say the CME’s rate, which is referenced by most cash instruments and – critically – is regulator-endorsed, already covers market requirements.
BW Take: The ICE Benchmark Administration’s launch of their own term SOFR rate takes a fundamentally different approach to the ARRC-endorsed CME term SOFR rate in that it references OTC swaps vs the CMEs methodology based on SOFR futures. For either reference rate, term SOFR hedging remains limited to end users with the CME not delivering term SOFR futures until after 6/23.

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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.

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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.

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The Bank Treasury Newsletter: April 2022

KBRA Analytics (R) | 4/28/2022

Bank treasurers are prepared for higher rates and expect that 2022 will be the year that loans expand, deposit growth moderates, and earnings per share increase. Volatility in Treasury rates has had a significant effect on the front end of the yield curve and widened the basis between floating rate benchmark rates. These include LIBOR and the new benchmarks intended to replace LIBOR, including the Secured Overnight Financing Rate (SOFR), Bloomberg Short-Term Bank Yield (BSBY), and Ameribor. The widening basis between these rates highlights the importance of understanding how each index calculates a term structure from one month out to one year.
BW Take: The monthly KBRA Bank Treasury Newsletter examines the effect of rising short term rates against SOFR, BSBY and Ameribor rates. As rates rise, the alignment of Term SOFR to BSBY and Ameribor has clearly diverged making reference rate selection an increasingly relevant consideration for bank lending.
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BSBY and Term SOFR swap volumes update

Clarus Financial Technology – Amir Khwaja | 4/27/2022

Clarus provides an update and analysis on BSBY and Term SOFR swap volumes for the months of March and April
BW Take: Term SOFR swap activity over the past two months has grown significantly from 8.5 bil in Feb to 17.5 and 13.2 bil in March and April (MTD). BSBY swap activity is beginning to show similar momentum (albeit lower volume) and consistent growth as BSBY adopters weigh the benefits of embracing and aligning a bank’s funding costs against a lending rate with a clearly defined forward looking term structure coupled with credit sensitivity.

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Banks face conduct risk threat as term SOFR trading grows ($) – James Ryder | 4/18/2022

The burgeoning market for swaps linked to the term version of the secured overnight financing rate (SOFR) is creating headaches for lawyers and compliance staff tasked with advising dealers on the strictures governing the products’ use. Term SOFR derivatives should only be used to directly hedge end-users’ exposure to loans and cash instruments, according to guidelines published by the Alternative Reference Rates Committee (ARRC), the Federal Reserve-backed group tasked with weaning US markets off Libor before June 2023. Interdealer trading in the rate is not permitted.
BW Take: Although the ARRC’s recommendations re the use of Term SOFR derivatives are limited to the end-user facing derivatives, it appears that adherence to these guidelines has been a bit opaque at times as questions arise over when a trade is being done for hedging or speculative purposes.

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THORNE HEALTHTECH, INC. : Entry into a Material Definitive Agreement (form 8-K)

Market Screener | 4/12/2022

Thorne HealthTech, Inc. (Thorne or the Company), entered into a Loan Agreement with Bank of America, N.A. (BofA or the Lender), with an effective date of March 31, 2022. Outstanding borrowings under the Loan Agreement will be subject to interest at a rate equal to the Bloomberg Short-Term Bank Yield Index rate (BSBY), plus 1.50 percentage points, adjusted on the first day of each month (the Adjustment Date).
BW Take: Thorne HealthTech’s recent loan agreement with Bank of America references Bloomberg’s BSBY rate adds to the list of clients who have traditionally financed against Libor that are adopting forward looking credit sensitive rates to provide a similar cost effective structure.

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Libor replacements are untested in a hiking cycle

Euromoney ($) – Paul Golden | 4/7/2022

Interest rate uncertainty may not have added to the complexity of the transition away from Libor pricing, but it has implications for forecasting that will only become clear as rate rises kick in.
BW Take: Interest rate uncertainty coupled with the historic move from Libor to a risk free rate is beginning to show some signs of fragility as SOFR based lending ignores the credit spreads that applies to a bank’s own funding cost structure. Euromoney references a recent Greenwich report on commercial lending that highlights some of the challenges that many are only just beginning to understand.

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Term SOFR restrictions spark valuation debate ($) – Bernard Goyder | 4/4/2022

Strict trading curbs on derivatives linked to a term version of the secured overnight financing rate, or SOFR, have ignited a debate over whether the hedging instruments should be classified as illiquid assets on dealer balance sheets.
BW Take: The mandated limitations for trading term SOFR derivatives beyond direct hedging of loans has created clear challenges resulting from the lack of a broader and more transparent market. As valuation concerns grow, it may increase the need to explore SOFR alternatives in the lending space.

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An Entire Decade Wasted At the Expense of Common Sense

Jeffrey Snider – Head of Global Research Alhambra Partners. | 4/2/2022

So much easier said than done, this saga has now extended to nearly mark an entire decade spent wasted on bureaucratic demands at the expense of common sense. Typical, I know. However, the stakes couldn’t be higher. This is the lynchpin which holds together vast expanses of global credit and money, trillions in loans and debt along with hundreds of trillions gross notional to derivatives contracts. Yes, LIBOR.
BW Take: An interesting walk down memory lane discussing the motivations for replacing Libor while also acknowledging the historic pushback from regional banks who critiqued SOFR as not being a well suited benchmark for lending. With rates rising, the need to adopt a reference rate that reflects the direction of rates during periods of economic stress is more apparent than ever.

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SOFR the First Three Months

LSTA – Meredith Coffey EVP – Research, Regulatory, CLO | 4/1/2022

On March 31st, LSTA’s Meredith Coffey joined a session at the ABA Business Law Section Spring Meeting discussing the phase-out of LIBOR on loans. While the shift to SOFR has been relatively smooth, new loans must address two major differences between LIBOR and SOFR. First, LIBOR is a forward looking “known in advance” rate. This means that borrowers and lenders lock in their rate in advance of the interest period – and this feature has defined loan documentation and operations for decades. Second, LIBOR is a credit sensitive rate, whereas SOFR is a risk-free rate – and this means that the SOFR loans require some adaptation to maintain economic neutrality with LIBOR loans.
BW Take: An excellent analysis on the complexities facing loan originations and financing in the post Libor world.

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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)