New Bloomberg Index Positioned as LIBOR Replacement Option
Written By: Joel Palmer, Op-Ed Writer
A new index is emerging as another possible replacement for LIBOR as the committee tasked with choosing alternatives continues to push an established option.
The Wall Street Journal reported last week that the newly released Bloomberg Short Term Bank Yield Index (BSBY) was used by Bank or America and JPMorgan Chase to exchange $250 million of an interest-rate swap earlier this month.
Bloomberg launched the BSBY in January. It is constructed using aggregated and anonymized data anchored in transactions of commercial paper, certificates of deposit, bank deposits, and short term bank bond trades. BSBY includes a systemic credit spread and term structure.
Bloomberg said BSBY can be used to supplement the Secured Overnight Financing Rate (SOFR) in the lending market.
SOFR is preferred by the Alternative Reference Rates Committee (ARRC) as the alternative to LIBOR. The ARRC is a group of private-market participants assembled by the Federal Reserve Board and Federal Reserve Bank of New York to identify risk-free alternative reference rates for LIBOR.
In 2019, the ARRC created a framework for using the Secured Overnight Financing Rate (SOFR) for use in adjustable rate mortgages (ARMs). SOFR measures the cost of borrowing cash overnight collateralized by Treasury securities.
Earlier this month ARRC released its Guide to Published SOFR Averages, which includes information on how SOFR Averages can be used today and what factors market participants should consider before selecting the alternative rate they use.
The committee said it published the guide after a recent survey found that 90 percent of respondents wanted to be offered SOFR-based rate choices, including SOFR averages that can be applied in advance and in arrears.
The Wall Street Journal report said that some large U.S. corporations and other borrowers preferred something other than SOFR to have a benchmark that could fix rates over longer time spans. The BSBY became a viable alternative when ARRC was slow to roll out a forward-looking reference rate.
ARRC said in March that it would not be able to recommend a forward-looking SOFR term rate by mid-2021 as it originally intended. The committee said it was not in a position to do so based on the current level of liquidity in SOFR derivatives markets. The ARRC said at the time it was also still evaluating the limited set of cases in which it believes a term rate could be used.
The Journal’s report also noted that some regional banks were using Ameribor, which is set on the American Financial Exchange and reflects what banks pay to lend to each other through mutual lines of credit.
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another. It is calculated and published daily by the Intercontinental Exchange.
LIBOR is expected to be discontinued sometime next year, as regulators in the United Kingdom will no longer require banks to report transactions used to calculate LIBOR.
This change will affect some adjustable rate loans and lines of credit, such as adjustable-rate mortgages, reverse mortgages, and home equity lines of credit.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
