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Author: Don Obrien

LIBOR Transition: Drama Continues For BSBY – Finance and Banking



United States:

LIBOR Transition: Drama Continues For BSBY


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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
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.

Disclaimer: This Alert has been
prepared and published for informational purposes only and is not
offered, nor should be construed, as legal advice. For more
information, please see the firm’s

full disclaimer
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