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Libor replacements multiply in shift that could fracture markets

(Bloomberg) – A slew of newer and lesser-known benchmarks are claiming a piece of the post-Libor landscape as the outlook for space increasingly fractures. rates, a clutch of upstart challengers, from Ameribor and BSBY to the ICE Bank Yield Index, have gained ground, or at least garnered more attention, in recent weeks. Their rise comes as borrowers and bankers increasingly question whether the Federal Reserve’s preferred replacement, the Guaranteed Overnight Funding Rate, is the best option for the multitude of markets that must ditch the tainted Libor. scandal by the end of the year. Importantly, two shortcomings that have long stuck with SOFR: the absence of a forward curve and the absence of a credit component – two key characteristics of Libor that the new rates all offer. Wall Street, for its part, has already started to signal some support for lesser-known alternatives. But while multiple rates can help meet the needs of various industries, they also risk making a complex transition even more difficult, while potentially slowing the build-up of liquidity in any benchmark. being the monolith, the market seems to have other views on what kind of benchmark it would like to have for very specific transactions, ”said Mark Cabana, head of US interest rate strategy at Bank of America Corp. the key rate in the future? I do not know. I think there are real questions about this. Nowhere is the race to succeed Libor more in the air than in the multi-billion dollar syndicated loan markets. Nearly half of respondents to a TD Securities survey released on May 14 identified loans when asked where they expect to see the most adoption of so-called credit-sensitive rates, with an additional 19% choosing all spot products and 22% choosing both spot and derivative markets. The lack of a forward-looking term structure, according to Meredith Coffey, executive vice president of research and public policy at the Loan Syndications and Trading Association. Yet the situation is more complex than a single obstacle. Borrowers, lenders and investors all have different needs that may be best met by different rates, said Coffey, who is also a member of the Alternative Benchmark Rates Committee, the Fed-backed group that is guiding the transition from Libor in USB banks that offer revolving credit. facilities, for example, are exposed to funding risk and therefore may be more inclined to transact based on a credit sensitive rate, while some borrowers may prefer SOFR, especially once a forward rate is forward. backed by robust derivatives trading can “The key thing is we’re going to be in a multi-speed environment,” Coffey said. “We have seen it. We expected it. And it is not a tragedy. For more on the transition away from Libor, subscribe to the Libor Countdown Last week, Duluth Holdings Inc. became the first non-financial company to secure a corporate syndicated loan linked to the performance index Bloomberg’s short-term banks. the first swap exchange and the first bank bond linked to the benchmark in April CME Group Inc., which launched SOFR futures more than three years ago, announced on Monday its intention to introduce contracts futures based on BSBY during the third quarter. – clearing of counter swaps will begin in the fourth quarter, pending regulatory review. CBOE Futures Exchange launched Ameribor Futures in August 2019.BSBY is administered by Bloomberg Index Services Limited, a subsidiary of Bloomberg LP, the parent company of Bloomberg News. last month, the LSTA included Ameribor, overseen by the American Financial Exchange, as a fallback option for its suggestion. contractual arrangements to help loans switch to alternative rates when Libor ends. The Bank Yield Index, for its part, has not yet been launched, but like BSBY and Ameribor, it will be forward looking and credit-oriented. It is overseen by the ICE Benchmark Administration, the same company that currently oversees Libor. Misra wrote in a recent note to clients. In another report, she said that “it is not known how a credit-sensitive rate would behave in the event of credit.” Bank of England Governor Andrew Bailey was more adamant earlier this month, telling an ARRC symposium that a myriad of credits “While these rates may offer an alternative to In the short term, they present a range of complex long-term risks, ”Bailey said during a panel with Federal Reserve Bank of New York President John Williams. “While they can remove the reliance on expert judgment, they position themselves on the fundamental challenges of thin and incomplete markets through extrapolation of data.” The ARRC encourages everyone to understand the benchmarks they choose as alternatives to Libor in order to avoid having to do so. to go through a costly and risky transition again, Tom Wipf, group chairman, said via email. He added that SOFR is a robust rate that will meet many needs of market players. Ultimately, few argue that SOFR will not play a significant role in the post-Libor landscape over the next several years, and many still see it. Pension funds will use it to hedge interest rate risk, while mortgage lenders will use it to hedge prepayment risk. The same is true for those who want to bet on the direction of US monetary policy. In fact, 60% of respondents to the TD survey said they expected the derivatives market to change. Primarily relies on an iteration of the rate as it moves away from the Libor. Others are not so sure. »What will be the dominant rate in five or ten years? This is where I have more doubts about SOFR due to its lukewarm adoption by the markets today, ”Bank of America’s Cabana said. “There is yet another chapter of the Libor transition that has yet to be written and which will involve credit sensitive rates.” (Adds announcement of CME Group BSBY futures in 12th paragraph.) More articles like this are available on bloomberg.com ahead of time with the most trusted source of economic news. © 2021 Bloomberg LP


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