February 3, 2021 - On February 2nd, LSTA EVP Meredith Coffey moderated a panel at the Chicago CFA’s LIBOR Cessation Webcast. While the panel covered the usual “when is LIBOR ending?” topics, much of the focus was on replacement rates, including alternatives to SOFR. We link to slides here and dive into new areas of debate below.
First up, the panel reiterated that the “end” of USD LIBOR likely has bifurcated into two parts. The banking regulators have said that new LIBOR loan originations must end “as soon as practicable” but no later than 12.31.21. However, the FCA and IBA likely will work to keep most USD LIBOR tenors going until 6.30.23 for legacy contracts only. Bottom line: There’s more time to remediate existing LIBOR exposures, but new LIBOR origination ends soon.
So, what replaces USD LIBOR? For institutional products, the general wisdom is that some version of SOFR likely will be the replacement. It is deep and liquid; it is likely to be “market standard” and thus probably the most easily hedged. However, SOFR is a risk-free rate and some banks have said they are interested in a rate that contains an element of bank credit risk, particularly when banks are making and holding revolvers. While acknowledging the broad use of SOFR, panelists also discussed potential alternative “credit sensitive rates” (“CSRs”) in the context of bank loans. For regional banks, “Ameribor” has garnered significant attention and was discussed in detail; Ameribor reflects the level at which regional banks can lend to each other on an overnight basis on the AFX. But there are other CSRs in development as well. As discussed in Risk.net, ICE created “Bank Yield Index” several years ago, Bloomberg has been building “BSBY”, Darrell Duffie and other academics have developed “AXI” and IHS Markit is building a credit sensitive spread over SOFR. These rates typically look to a number of potential bank funding mechanisms, including deposit rates, CD, CP and bonds to build a reference rate that contains a bank credit component.