Posted by Mark Daley on 27 August 2021
Tagged to Bank of England, IOSCO, LIBOR, Treasury

The minutes of July’s Sterling working group on RFRs cautioned any regulated UK market participants looking to use credit sensitive rates in UK-based business “to consider the risks carefully”, and a 5 July speech by the Bank of England’s Edwin Schooling Latter included:

“We don’t want to see transition to new so-called 'credit sensitive' rates such as Bloomberg’s Short Term Bank Yield index – known as BSBY – that some have suggested as a possible successor to LIBOR in some contracts. Authorities in both the UK and US have warned publicly about the risks embedded in these so-called 'credit sensitive' rates.  They share many of the same flaws as LIBOR. That’s because they are derived largely from transactions in Commercial Paper (CP) and Certificate of Deposit markets. Yet liquidity in those markets has not proved robust to stress, as we saw vividly in March last year, when liquidity in CP markets dried up, and yields spiked. By contrast, the markets supporting SOFR, and SONIA, did prove robust”.

The general reference to “these so-called credit sensitive rates” led me recently, and probably others, to assume that it included Ameribor - which is, after all, undoubtedly a credit-sensitive rate, and which is based on unsecured inter-bank lending, as LIBOR was before the interbank market seized up in the GFC and expert judgment came to the fore).  Ameribor is calculated by reference to interbank transactions, done via the American Financial Exchange (which has approximately 180 primary members, generally mid-size regional US banks, representing 25% of US banking sector assets), and not on CP and CD markets (and neither was LIBOR, of course, so this comment is somewhat ambiguous). 

In any event, statistics from the AFX (behind a paywall but you can see a table in Value Walk in June 2020) showed no obvious sign of volume disruption during March 2020.  In June 2021 Janet Yellen, the US Treasury Secretary (echoing earlier comments from Federal Reserve chairman Jerome Powell) confirmed that SOFR was suitable for use in most products, and had underlying transaction volumes that were unmatched by other LIBOR alternatives, but it should be noted that Powell also added that Ameribor was “based on a cohesive and well-defined market that meets the IOSCO principles for financial benchmarks” and was “a fully appropriate rate for the banks that fund themselves through the AFX or for other similar institutions for whom Ameribor may reflect their cost of funding”.  Any UK borrowers in receipt of a proposal to use Ameribor will want to understand how the rate behaves, but may conclude that Ameribor is in fact a liquid alternative.

The authors

Mark Daley
Mark Daley

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