Loan Syndications & Trading Association
On July 27th, Financial Conduct Authority CEO, Mr. Andrew Bailey made it clear the replacement of LIBOR has a date and it is 2021. For last couple of years, since the LIBOR rigging scandal, LIBOR alternative discussions are ongoing in US, UK, Europe, Japan and Switzerland.
Of the $150Tn of financial products that refer LIBOR, $4Tn is syndicated loan market ($0.95Tn is leveraged loan). LSTA is focusing on ensuring there is smooth transition (to avoid any market disruption) to the alternative reference benchmark as and when it is decided. In credit agreements there are fallback options in case the LIBOR screen rate is unavailable or if there is a “market disruption event”; but these are for temporary interruptions.
Benchmark identified for US $ denominated financial products
The Alternative Reference Rates Committee was convened (in 2014) to identify a set of alternative reference interest rates that are more firmly based on transactions from a robust underlying market. The rate would be first adopted in $200T US derivatives market in a phased manner.
Broad Treasuries Repo Rate
- ARRC has expressed a preference for this rate
- Cost of overnight loans that use US government debt as collateral
- It includes both cleared triparty and bilateral data
- Since it is a secured rate, it will be lower than LIBOR (unsecured rate)
- Average daily trading volume of $660B
- By mid-2018, it will be published by Federal Reserve Bank of New York
In its recent webcast on Aug 17th, LSTA raised a pertinent question:
“How do the loan and CLO markets prepare for a rate that does not exist yet?”
Benchmarks identified for other currencies
Sterling Overnight Index Average (SONIA) (Sterling)
- Overnight funding rates in the sterling unsecured market.
- Governed by BoE from 2016.
- Voted by working group of major dealers (incl.Barc, GS, DB) to be used an alternative to Libor for use in sterling derivatives.
- Market consultation paper will be out before end of year.
- Has been around 20 years and the overnight interest rates "are considered close to risk-free”.
Euro Overnight Index Average (EONIA) (EURO)
- Weighted average of all overnight unsecured lending transactions made in the euro area interbank market
- Calculated by ECB and published by Thomson Reuters
- Introduced in 2013
- As of 8/17 the rate was -0.358%
Swiss Average Rate Overnight (SARON) (CHF)
- Based on repo transaction data as well indicative quotes posted by Traders
- Unsecured rate.
- Replaced repo overnight index (SNB) since 25th Aug 2009
- Governed by the Swiss National Bank and SIX Swiss Exchange
Tokyo Overnight Average Rate (TONAR) (JPY)
- Overnight unsecured rate
- Governed by The Bank of Japan based on data provided by money market brokers.