New Developments in USD Reference Rates

The rise of new, credit sensitive benchmarks in USD presents users with a range of options which may better suit their purposes. As markets begin to move away from USD LIBOR there has been some resistance to using a single reference rate such as SOFR. The pricing challenges of switching from the familiar processes of LIBOR to a new rate with little (or no) credit and liquidity margin as well as the operational challenges of using a rate like SOFR (where the final reference is only known at the end of the relevant period) has presented many users with a good reason to delay transitioning away from LIBOR. The SOFR alternatives actually operate similarly to LIBOR and help solve many of the operational issues. They include:

Reference Rate Administrator Description (all forward-looking term rates)

Term SOFR CME Calculated from CME SOFR futures and possibly OIS, no credit spread

BSBY Bloomberg Calculated from bank funding in unsecured markets

CRITS/CRITR IHS Markit Calculated from USD CD and CP market (‘S’ is Spread and ‘R’ is Rate)

IBYI ICE Similar to BSBY and has been puiblished for over 2 years

AXI SOFR Academy Calculated from credit spreads out to 5 yeears which is then scaled to 1, 3 and 6 month

While all these alternatives have a term structure and most have a credit spread (except Term SOFR) they are all subtly different and some may be more appropriate for certain uses rather than others.

The advantage of all is that they are operationally similar to LIBOR (set at the start of the relevant period) and have a term structure. This makes them all easier to implement in current systems and processes and allows many users access to LIBOR replacements.

The markets will decide which reference rates dominate but these are significant contributors to LIBOR transition. Risk.net has a great article on the alternatives here.

Martialis is very experienced in managing LIBOR transition for many clients. These new reference rates may be appropriate for your needs and we can assist in assessing the options.