Eeny, Meeny, Miny, Muse; Which LIBOR Alternative Shall I Choose?
By now most, if not all, financial market participants know that the recommended alternative for the London InterBank Offered Rate (“LIBOR”) for U.S. Dollars is the Secured Overnight Funding Rate (“SOFR”). Many also are aware that, in addition to SOFR, five additional benchmark rates and/or spread adjustments have been proposed to replace LIBOR. These alternative benchmarks generally capture the cost of unsecured bank borrowing, which is the cost that LIBOR also reflects and which is a rate that is more relevant to the way many banks fund themselves than SOFR, which is a secured overnight rate based on transactions in U.S. Treasury securities.
The following chart summarizes what we know so far about these alternative benchmarks:
| Alternative | Basis | Administrator | Forward Term Structure? | # Public Filings | Fallback provisions |
| SOFR | Bilateral and tri-party Treasury securities repurchase transactions | Federal Reserve Bank of New York |
Not in recommended form. CME is publishing indicative rates for 1-, 3-, and 6- months |
1 | None |
| Bloomberg Short-Term Bank Yield Index | Commercial paper, certificates of deposit, deposits, senior unsecured bank corporate bonds | Bloomberg Index Services Limited |
Yes. 1-, 3-, 6-, and 12-months |
2 |
1. a. Term SOFR, b. Daily Simple SOFR, c. agreed rate 2. Agreed rate |
| Ameribor | Daily executed transactions in the overnight unsecured loan market on the AFX | American Financial Exchange |
Yes. 1-week 1-, 3-, and 6-months 1- and 2-year |
None | —- |
| ICE Bank Yield Index | Wholesale, unsecured bank investment yields for primary market funding transactions and secondary market bond transactions | ICE Benchmark Administration |
Yes, as test rates. 1-, 3-, 6-, and 12-months |
None | —- |
| Credit Inclusive Term Rate (CRITR) and Credit Inclusive Term Spread (CRITS) | Commercial paper, certificates of deposit and short-term corporate bonds issued by banking institutions | IHS Markit Benchmark Administration |
Not in approved form. IHS Markit is publishing indicative rates for 1-, 3-, 6-, and 12-months |
None | —- |
| Across-the-Curve Credit Spread Index (AXI) and Financial Conditions Credit Spread Index (FXI) |
AXI – Credit spreads of short- and medium-term unsecured bank funding transactions
FXI – an extension of AXI that incorporates data based on transactions of both financial and non-financial corporate debt instruments |
SOFR Academy |
Still under development. 1-, 3-, 6-, and 12-months expected |
None | —- |
As noted above, in this limited universe of market transactions, the SOFR agreement did not provide a fallback provision, while one of the BSBY agreements falls back to SOFR or, if SOFR is unavailable, an agreed rate, and the other BSBY agreement falls back to an agreed rate only. In comparison, the ISDA 2020 IBOR Fallbacks Protocol offers a robust multi-tiered waterfall of fallback rates for LIBOR, starting with SOFR and, if SOFR is unavailable, falling to (a) the Fed Recommended Rate (the Fed-recommended replacement for SOFR), (b) the Fed’s Overnight Bank Funding Rate, and finally (c) the Fed’s Federal Open Market Committee Target Rate.[i]
While some regulatory officials recently have expressed that SOFR is a preferred benchmark replacement (specifically as compared with BSBY),[ii] the joint regulators have not revised their November 2020 guidance in which they acknowledged that banks should assess the suitability of alternative reference rates in light of their funding models and customer needs, and will not be criticized for using a suitable reference rate other than SOFR to replace LIBOR.[iii]
With the ARRC “best practice” recommendation date for cessation of new LIBOR-linked loans upon us (i.e., 30 June 2021), we are seeing increased activity in implementing alternative reference rates and expect to see substantial transition progress (and, hopefully, rate preference clarity) during the third quarter of the year.
[i] See definition of “Applicable Fallback Rate” in ISDA 2020 IBOR Fallbacks Protocol.
[ii] See remarks of SEC Chair, Gary Gensler, at the 11 June 2021 Financial Stability Oversight Council meeting and his subsequent remarks at the 23 June London City Week.
[iii] See Statement on Reference Rates for Loans, 6 November 2020, and Statement on LIBOR Transition, 30 November 2020.
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