01 October 2018

Financial Times: Alternatives to Libor begin to make an impact

In July, US government mortgage agency Fannie Mae issued $6bn of bonds linked to a new interest rate called the Secured Overnight Financing Rate (Sofr). The World Bank followed in August with a $1bn issuance and Credit Suisse became the first commercial bank to issue debt tied to Sofr.

“The recent issuance has really spurred the market into action,” says Mark Cabana, an interest rate analyst at Bank of America Merrill Lynch. “It lit a fire under the seat of those market participants that were not yet able to transact in Sofr to get their systems up to speed. If we continue to see Sofr issuance grow, that will only further advance efforts to move away from Libor.”

George Richardson, director of capital markets for the World Bank, puts it more bluntly: “The switch to Sofr is going to happen.”

Different regions across the globe are following suit, developing their own new reference rates. In the UK, Lloyds Banking Group sold $750m of debt pegged to the reformed interest rate benchmark Sonia, weeks after the European Investment Bank pioneered its use to sell a $1bn bond.

“It gives a sense of the potential,” says Chris Conetta, head of US rates cash trading at Barclays.

Libor was disgraced after a rigging scandal that has seen bankers across the industry jailed and fined. Part of the problem stemmed from the lack of actual transactions tied to the interest rate. Despite underpinning the interest payments on trillions of dollars worth of loans, derivatives and other securities, the interest rate itself has been largely a gauge of big banks’ borrowing costs curated from banks’ own estimates of what it would cost them to borrow cash, rather than real transactions.

The Sofr rate is a broad measure of the cost of borrowing cash overnight secured against Treasury securities, based on real transactions.

Full article on Financial Times (subscription required)

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