Bloomberg: As LIBOR is Phased Out, A Slew of Replacements Could Fracture the Market

As the London Interbank Offered Rate (LIBOR) rate index is phased out of use by more and more business segments, a number of potential replacement indices have emerged in an attempt to take its place that could potentially fracture the landscape of reference rates. This is according to a story published by Bloomberg.

“Once largely considered afterthoughts in the race to replace [LIBOR], a clutch of upstart challengers, from Ameribor and BSBY to ICE’s Bank Yield Index, have been gaining traction, or at least garnering more attention, in recent weeks,” the story reads. “Their ascent comes as borrowers and bankers increasingly question whether the Federal Reserve’s long-preferred replacement, the Secured Overnight Financing Rate [(SOFR)], is the best option for the multitude of markets that must ditch scandal-tainted LIBOR by year-end.”

However, a couple of key shortcomings with SOFR hamper its potential widespread adoption according to the story, including the lack of a forward-looking curve and the absence of a credit component: two features of LIBOR that other, newer indices feature.

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“Wall Street, for its part, has already begun signaling some support for the lesser-known alternatives,” the story says. “But while multiple rates could help meet the needs of various business lines, they also risk making a complex transition even more difficult, while potentially slowing the build up of liquidity in any one benchmark.”

The “race” to find a new successor rate index is most felt in syndicated lending markets, which collectively make up trillions of dollars according to the story.

“Almost half of respondents in a TD Securities survey published May 14 singled out loans when asked where they expect to see the greatest adoption of so-called credit-sensitive rates, with another 19% choosing all cash products and a further 22% selecting both cash and derivatives markets,” the story says.

In addition to serving as the Federal Reserve’s preference, SOFR is also the stated preference of the reverse mortgage industry to serve as the rate index for adjustable-rate Home Equity Conversion Mortgages (HECMs).

Late last year, the Fed endorsed a swift departure from the LIBOR index, and the Federal Housing Administration (FHA) published a Mortgagee Letter (ML) in March which “removes approval for use of the LIBOR index for adjustable interest rate HECMs,” approving the industry’s preferred index of SOFR while providing a timeline for how and when the changes will be implemented.

Read the story at Bloomberg.

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