(Repeats to widen readership)
By Karen Brettell
April 26 (Reuters) - New U.S. bank credit benchmarks are
expected to gain traction in the coming months as the deadline
to phase out exposure to the discredited Libor approaches, even
as regulators continue to push an alternative called the Secured
Overnight Financing Rate (SOFR).
Investors are facing a year-end deadline to stop basing new
loans and trades on Libor, an acronym for the London Interbank
Offered Rate. Some Libor rates will stop being published at the
after Dec. 31, while others are scheduled to end in mid-2023.
Libor is being phased out as a reference rate due to
concerns about the amount of derivatives using the rate, which
in many cases is based on assumptions about their borrowing
costs and not actual trades, and after it was manipulated before
and during the financial crisis.
The shift will require more than $200 trillion in trades and
loans to move to new benchmarks. The move will also likely
result in several new indexes gaining prominance, reducing the
historical reliance on just one key rate.
Most derivatives contracts based on Libor are expected to
migrate to SOFR, the benchmark endorsed by regulators to replace
Libor. This index is based on around $1 trillion in daily loans
in the U.S. overnight repurchase agreement market.
But many banks and investors want a rate that includes a
bank credit component for loans and will instead turn to
Richard Sandor, chairman and CEO of the American Financial
Exchange, which offers the Ameribor index, said that the shift
away from Libor is an opportunity that “occurs once in 100
years,” adding that he has “never been more bullish.”
Ameribor and Bloomberg’s Short-Term Bank Yield Index (BSBY)
are gaining interest as benchmarks for loans, though the move is
in its early stages. ICE Benchmark Administration, part of the
Intercontinental Exchange ICE.N , also plans to offer the U.S.
Dollar ICE Bank Yield Index as a Libor replacement.
Zions Bancorporation ZION.O said this month that it will
use Ameribor as a replacement for Libor in most of its
non-syndicated commercial loans.
Banks want loans to include a measure of their borrowing
rates in case these costs increase.
Bank of America BAC.N also said last week that it has
issued a $1 billion, six-month floating rate note referencing
Bloomberg’s index. Standard & Poor’s and Fitch Ratings have both
indicated that BSBY meets their requirements as a money market
reference rate, opening the door to money fund investments in
notes based on the index.
“BSBY could become an increasingly common benchmark rate. It
has several desirable features relative to SOFR,” said Daniel
Krieter and Daniel Belton, analysts at BMO Capital Markets.
Market participants were frustrated after the Alternative
Reference Rate Committee (ARRC), a group of market participants
that selected SOFR to replace Libor, said in March that it will
not be able to recommend a forward looking SOFR rate by
mid-year, its former target date.
The CME Group CME.O has since said that it will offer SOFR
term rates based on its SOFR futures trading.
The New York Federal Reserve began publishing SOFR in April
2018, but the shift away from Libor has been slow.
Around $223 trillion worth of contracts now reference U.S.
dollar Libor, compared with $199 trillion at the end of 2016,
the ARRC said last month.
Most derivatives are expected to shift to SOFR, though a
portion of the market used to hedge loans is expected to
reference the credit alternatives.
Trading in the CME Group’s SOFR futures rose to a record
112,000 average daily contract volume in the first quarter,
though this remains well below the 2.72 million in average daily
contract volumes for Eurodollar futures based on Libor.
The CME has said that it will shift any remaining eurodollar
contracts based on Libor to SOFR futures when the Libor rate
stops being published in mid-2023.
For many, the solution going forward may also be a hybrid
that includes SOFR as a base and adds a credit component when
“I’m pretty much convinced SOFR will be the dominant rate
going forward and you will have participants who will choose to
add a systemic spread onto that to take you to something like a
synthetic Libor,” said Padhraic Garvey, regional head of
research, Americas, at ING.
USD Libor Exposures https://tmsnrt.rs/3niY1Hw
(Reporting by Karen Brettell; Editing by Alden Bentley and