In the context of heavy criticism and targeted attacks from the authorities on credit-sensitive rates (CSR), Bloomberg’s global head of index-linked products, Umesh Gajria, looks back on the path and success of BSBY – the CSR offered by Bloomberg – since launch, both as a rate in itself and in the wider context of the USD Libor transition. Practice Insight also discussed future developments around the rate, including an upcoming consultation on ways to increase resilience in times of market stress.
Practice Insight: How have things developed since BSBY’s launch in April this year?
Umesh Gajria: BSBY has been very well received by the market. Our clients are pleased with both the methodology and the robustness of the index. We've been focused on supporting the overall Libor transition efforts, both in the public and private sector, making sure we give our clients the various tools and products that will help to make their transition easier. The loan market, in particular, is starting to see more and more interesting activity as we approach October.
The Libor transition is complicated, and the varied set of clients it covers has a wide range of use cases. We know one size does not fit all, hence we've been trying to provide different versions of SOFR [the Secured Overnight Financing Rate], such as averaging and compounding in arrears for derivatives and cash markets.
BSBY is one of the many solutions that we provide, and we are looking at it in a broader context to help clients in all areas – not just the in the loan market.
In which parts of the market has pick-up been the strongest for BSBY?
BSBY is a very versatile rate, but the main area of interest has been lending products, such as business loans or revolvers. For risk management purposes, we've also seen some swaps and futures activity on the back of those loans. We also saw some floaters in securities markets being issued in BSBY’s early days.
See also: Iosco statement revives credit-sensitive rates debate
Other areas of interest have been in trade finance and transfer pricing. Both borrowers and lenders, including banks and corporates of all sizes, now have a pretty good understanding of the benefits and efficiencies that BSBY brings to lending products.
SOFR derivatives picked up significantly after SOFR First. Now, with the loan market finding a solution in BSBY that's fit for purpose, we believe that will be very helpful in speeding the entire market’s move away from Libor as we approach the year-end deadline.
Has pick-up been as fast as you hoped?
The measure of success for us is that it is a strong product that fulfils market and client needs. We’re very pleased to see that these clients will help us and collaborate to further develop BSBY for their needs. We have received very positive feedback so far, and clients continue to onboard, especially in the lending products space. We're very pleased on that front. As for targeting any speed, it's really the clients that should choose how quickly they want to adopt and finish their transition obligations. Our focus is on providing a solid product that meets their needs.
BSBY seems particularly popular among the credit-sensitive rate offering. What makes it different to its competitors?
There are a few reasons why BSBY has received such positive feedback from the market. We built that rate from the ground up to ensure that it is Iosco- [International Organization of Securities Commissions] compliant and meets all the global standards. We also have the most robust set of data and unique capabilities in terms of expertise to build a methodology that always works well at all times – during good ones, and stressful ones. This has been proven during the Covid-19 crisis.
We're also ensuring that BSBY works well in the broad ecosystem of redistributors and exchanges, as well as clearinghouses. For that purpose, we've collaborated quite broadly with the industry. As an example, we worked with the world's leading derivatives exchange CME for their launch of futures, which will provide users with an ability to manage risk. We've worked closely with our clients, as well as industry associations, to make sure that we are delivering quickly so that people can meet their obligations, and that BSBY works in industry documentation and with all the other aspects of the interest rate ecosystem.
Do you see a future with SOFR being the unique replacement rate, or do you believe one or more credit-sensitive rate will continue to run alongside it?
The need for more than one reference rate has been broadly recognised by regulatory authorities in the US. They've publicly stated that while SOFR is the preferred alternative to Libor – which we also agree with – banks may use different reference rates for loans, and may determine that other alternatives are more appropriate for their funding model and customer needs.
A multi-benchmark approach has also been adopted in other markets, such as Japan, Canada and Europe. There are different rates and different types all around, and in the US, we see multiple rates continuing to exist alongside SOFR, too. Considering the request of numerous lending market participants and borrowers, we think BSBY will help both lenders and corporate treasurers with asset liability management. It will ensure that there is credit available for borrowers and end users during times of market stress.
See also: Buyside favours SOFR over credit-sensitive rates
Ultimately, the market will determine the extent to which the usage of a rate such as BSBY will be needed in the future. But for as long as the need for other alternatives subsists, different rates will coexist. BSBY will always serve a purpose, to the extent that lending markets continue to operate.
BSBY’s credibility as a robust alternative to USD Libor has been heavily criticised by regulators in recent months. How would you respond to that criticism?
We're confident that BSBY adheres to the Iosco Principles for Financial Benchmarks, as we've built it with that intent from the ground up. Bloomberg Index Services Limited (BISL), the administrator of BSBY, did not just self-certify its compliance with these principles – we worked alongside a big four accounting firm to conduct an independent assurance review, which was published on our website for transparency. We recognise that we went through that review back in April and that it was a point-in-time review. However, the accounting firm we work with will conduct periodic reviews in addition to our continuous and close monitoring of BSBY's design and underlying market. We will continue to have independent reviews periodically to ensure that we continue to align with global standards and principles.
At the end of the day, our goal is working with our clients and providing them with the tools they need, and that's our focus.
Have there been any tweaks to BSBY or its underlying methodology since launch?
We're always engaged with our clients on opportunities to further strengthen our products. As an example, we recently added DTCC as a data source for commercial paper and certificate of deposit transactions in the US, making our methodology even more robust in terms of the underlying data. We've also been working with clients and industry associations to further increase the resiliency of BSBY during extreme stress conditions and have published a consultation. We are also consistently working to ensure that BSBY works seamlessly with trade associations’ documentation, as they work diligently to install robust fallback language for BSBY and other rates.
Some sources previously suggested that the emergence of term SOFR would take away some of the use cases for credit-sensitive rates, potentially making them redundant. Have you perceived the term rate’s emergence as a threat?
This is really about client choice. No matter what rate we’re considering, if it suits a client needs and is available, that's a good thing for the market overall. So no, we didn't look at term SOFR that way.
Any other long-term plans for BSBY?
Aside from working with ISDA on the development of a fallback language and of the imminent resiliency consultation, we believe that BSBY is now fit for purpose and meets the market’s needs. Near-term for us, the focus is to continue collaborating with them, and help them onboard quickly to support their transition plans. For now, we're sticking to that plan.
How confident are you feeling that the market is on the right path to achieve no-new-Libor by year-end?
It's not surprising to see that most transition efforts are happening during the last few weeks or months before the deadline. Markets, however, always have a way of figuring things out. When there's deadlines, there's usually good incentives for people to do what it takes to meet them. It's not the first time we’ve been confronted with an exercise of that scope – there have been many of these before. I'm confident that the industry will eventually get there – with or without an extension.