LIBOR transition: the drama continues for BSBY

As Bloomberg and banks like Bank of America in the United States and DBS Bank in Singapore continue to move forward with BSBY, IOSCO shaken its saber last month with a statement on credit-sensitive rates, highlighting the importance of choosing alternative financial benchmarks that comply with the IOSCO Principles. The latest volley in the continued back-and-forth between regulators and supporters of new credit-sensitive rates came in July, when Bloomberg attempted to address some of the volume and manipulation concerns raised by the President of the SEC Gary Gensler and others with BSBY.

The IOSCO statement retorts that by clarifying that IOSCO compliance is not a one-time test, and even if the transaction volumes are sufficient for the current loan volumes in these benchmarks, the loan volume is not should not be allowed to increase if it exceeds the increases in the underlying transactions. volumes and are unable to be resilient. BSBY is not mentioned by name, but it has been the main subject of attention.

Two weeks after the publication of his warning by IOSCO, Gensler spoke at ARRC’s fifth session of the SOFR Symposium: The Final Year, in response to Bloomberg’s July report that he “ could not address the main concern that the rate is built in too small a market. . “Gensler reiterated that he “did not believe that BSBY was, as the FSB requested,” particularly robust “”, adding that “I do not think it meets the 2013 IOSCO standards”.

Unless regulators back their words up with action, this drama is mostly noise and lenders are free to continue giving BSBY loans. Their success will depend in part on whether borrowers perceive BSBY as a better deal. For legacy LIBOR loans, the spread adjustment added to the interest rate for the transition to SOFR was fixed by market agreement: around 11.5 basis points for a period of 1 month, 26 basis points for 3 months and 43 basis points for 6 months. This adjustment reflects that LIBOR is an unsecured rate sensitive to fluctuations in credit risk while SOFR is a secure and relatively stable “risk-free” rate. Since BSBY is also based on insecure transactions, it should not be necessary to add much, if any, of spread adjustment to move from LIBOR to BSBY. This lower spread could be attractive to borrowers if they believe that over time BSBY’s variable credit sensitivity will not increase the rate, relative to SOFR, more than the SOFR fixed spread adjustment. .

About Myra R.

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