United States: Eeny, Meeny, Miny, Muse; Which LIBOR alternative should I choose?
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By now, most, if not all, participants in the financial markets know that the recommended alternative for the London Interbank Offered Rate (“LIBOR”) for the US dollar is the guaranteed overnight finance rate ( “SOFR”). Many also know that in addition to SOFR, five additional benchmark rates and / or spread adjustments have been proposed to replace LIBOR. These alternative benchmarks typically capture the cost of unsecured bank borrowing, which is the cost that LIBOR also reflects and which is a rate more relevant to how many banks finance themselves than SOFR, which is an overnight rate. the secure day based on US transactions. Treasury securities.
The following table summarizes what we know so far about these alternate references:
|Alternative||Based||Administrator||Term to term structure?||# Public deposits||Fallback provisions|
|SOFR||Bilateral and tripartite Treasury securities buyback operations||Federal Reserve Bank of New York||
Not in the recommended form.
CME publishes indicative prices for 1, 3 and 6 months
|Bloomberg Short Term Bank Yield Index||Commercial paper, certificates of deposit, deposits, senior unsecured bank bonds||Bloomberg Index Services Limited||
1, 3, 6 and 12 months
1. a. SOFR term,
b. Simple daily SOFR,
vs. agreed rate
2. Agreed rate
|Ameribor||Transactions executed daily in the day-to-day unsecured loan market on AFX||American financial exchange||
1, 3 and 6 months
1 and 2 years
|ICE Bank Yield Index||Wholesale bank investment returns unsecured for primary market financing transactions and secondary market bond transactions||ICE Benchmark Administration||
Yes, as a test rate.
1, 3, 6 and 12 months
|Credit Inclusive Term Rate (CRITR) and Credit Inclusive Term Rate (CRITS)||Commercial paper, certificates of deposit and short-term corporate bonds issued by banking institutions||Administration of IHS Markit benchmarks||
Not in approved form.
IHS Markit publishes indicative prices for 1, 3, 6 and 12 months
|Full-Curve Credit Spread Index (AXI) and Financial Conditions Credit Spread Index (FXI)||
AXI – Credit spreads for unsecured short and medium-term bank financing transactions
FXI – an extension of AXI that integrates data based on financial and non-financial corporate debt instrument transactions
Still under development.
1, 3, 6 and 12 months expected
As indicated above, in this limited universe of market transactions, the SOFR agreement did not provide for a fallback clause, while one of the BSBY agreements reverts to SOFR or, if SOFR is not available, to a agreed rate, and the other BSBY agreement reverts to at an agreed rate only. In comparison, the IBOR ISDA 2020 backup protocol offers a robust multi-tiered cascade of backup rates for LIBOR, starting with SOFR and, if SOFR is not available, increasing to (a) the recommended rate. by the Fed (the Fed’s recommended replacement for SOFR), (b) the Fed’s overnight bank financing rate, and finally (c) the Fed’s Federal Open Market Committee target rate.1
While some regulators have recently expressed that SOFR is a preferred benchmark surrogate (especially over BSBY), 2 the joint regulators did not revise their November 2020 guidelines in which they recognized that banks should assess the suitability of alternative benchmarks in light of their funding models and the needs of their clients, and will not be criticized for using an appropriate benchmark rate other than SOFR to replace LIBOR.3
With the ARRC ‘best practice’ recommendation date for terminating new LIBOR-linked loans (i.e. June 30, 2021), we are seeing increased activity in the implementation of LIBOR rates. benchmarks and we expect to see substantial progress in transition (and hopefully clarity of preference rates) during the third quarter of the year.
1. See the definition of âapplicable fallback rateâ in the ISDA 2020 IBOR fallback protocol.
2. See SEC Chairman Gary Gensler’s remarks at the June 11, 2021 Financial Stability Supervisory Board meeting and his subsequent remarks at London City Week on June 23.
3. See Statement on Lending Reference Rates, November 6, 2020, and Statement on LIBOR Transition, November 30, 2020.
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