LIBOR Transition: Drama Continues for BSBY

As Bloomberg and banks like Bank of America in the US and DBS Bank in Singapore continue to push forward with BSBY, IOSCO last month rattled its saber with a statement on credit sensitive rates, highlighting the importance of choosing alternative financial benchmarks that are compliant with the IOSCO Principles. The last volley in the continuing back and forth between regulators and proponents of new credit sensitive rates came in July, when Bloomberg tried to address some of the volume and manipulation concerns raised by SEC Chair Gary Gensler and others with BSBY.

The IOSCO statement counters that with a caution that IOSCO compliance is not a one-time test, and even if trading volumes are sufficient for current volumes of loans in such benchmarks, loan volume should not be permitted to grow if it outpaces increases in underlying trading volumes and are unable to be resilient. BSBY is not mentioned by name, but it has been the primary subject of attention.

Two weeks after IOSCO published its cautionary statement, Gensler spoke at the ARRC’s fifth session of The SOFR Symposium: The Final Year, responding to Bloomberg’s July report that it “could not address the main concern that the rate is built off of too thin a market.” Gensler reiterated that that he did not “believe BSBY is, as FSB urged, ‘especially robust,’” adding that, “I don’t believe it meets IOSCO’s 2013 standards.”

Unless regulators back up their words with actions, this drama is mostly noise, and lenders are free to continue to make BSBY loans. Whether they will be successful 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 to transition to SOFR has been set by market convention—about 11.5 basis points for a 1 month term, 26bps for 3 months and 43bps for 6 months. This adjustment reflects that LIBOR is an unsecured rate that is sensitive to fluctuations in credit risk while SOFR is a secured, relatively stable “risk free” rate. Since BSBY is also based on unsecured transactions, there should not be a need to add much, if any, spread adjustment to transition from LIBOR to BSBY. This lower spread could be attractive to borrowers if they believe that over time, the variable credit sensitivity of BSBY will not cause the rate to rise, relative to SOFR, more than the fixed SOFR spread adjustment.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: BSBY Out of the Gates First

With all the regulator and market focus on SOFR as the LIBOR replacement of choice, it’s easy to forget that there are other replacement rates vying for market attention. We’ve written about Ameribor and highlighted some of the recent developments in its adoption. For the most part, support for Ameribor has come from smaller Main Street banks looking for a credit-sensitive rate that more closely matches the unsecured basis on which they borrow funds.

On October 15, 2020, Bloomberg threw its hat into the ring with its Bloomberg Short Term Bank Yield Index (BSBY). After a couple of months of publishing the rate on an indicative basis, Bloomberg launched the rate on January 20, 2021, and announced in early March that the rate is available for use as a replacement benchmark rate. Read on our recently published Alert to learn more about BSBY and recent developments relating to the rate.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.