Please reach out to the Chatham team if you have questions around the USD LIBOR transition or how the use of SOFR in your loans and derivatives could impact your interest rate exposure. SOFR Averages and Index Data As an extension of the Secured Overnight Financing Rate (SOFR), the SOFR Averages are compounded averages of the SOFR over rolling 30-, 90-, and 180-calendar day periods. I have been on various industry calls and the view: There is no regulatory risk with BSBY i.e., no bank or other regulator is going to make BSBY illegal or otherwise go away, in an effort to promote SOFR. These versions are derived from Overnight SOFR, which is compounded or averaged over 30, 90, or 180 days, meaning theyre also retroactive. The Center for Microeconomic Data offers wide-ranging data and analysis on the finances and economic expectations of U.S. households. How SOFR, the benchmark rate chosen by the ARRC to replace USD LIBOR, works and what drives its movements. Charlotte, NC 28203. The price at the close of any liquid market-wide short-term credit-risky debt instrument would replace LIBOR . When a CMBS loan is originated, its common to then securitize that loan, which is the conversion A slightly irreverent take on interest rate markets and the economy. In identifying SOFR, the ARRC ruled out the use of certain other rates, including the Effective Federal Funds Rate, citing market size and the potential to constrain monetary policy, as well as Treasury bill or bond rates, citing concerns around certain technical factors and how they respond to safe haven demands in periods of stress. H\Pj0+t=,N -i?Fq With all that said, people much smarter than me have very likely already thought this one through and can discuss forward looking curves for both rates. 4. Among other differences from LIBOR, SOFR (i) is considered a "'near risk-free rate'" (i.e., it lacks a credit risk component) because it is secured by U.S. Treasuries; and (ii) at least until recently lacked a forward-looking component such as LIBOR's one-week and one-, two-, three-, six- and twelve-month tenors. However, if SOFR is not published on a US business day, the previous days Term SOFR rate may be used up to three days. The webinar, This is the form used by administrative agents when a lender joins the syndicate and must provide the agent with its contact details, wiring instructions,. It will be interesting to see which has better pricing for Borrower-facing swaps. Wednesday, the ARRC announced (HERE) the expectation to endorse CMEs Term SOFR in late July or early August. Second, if the loan had a LIBOR floor, the floor would be measured against SOFR plus the ARRC spread adjustment. %%EOF Banks have since started issuing debt and selling hedges based on Term SOFR. The rate is published by the New York Federal Reserve to serve as a rate upon which other debt transactions can . In June 2017, the Alternative Reference Rates Committee (ARRC), a private-public partnership convened by the Federal Reserve Board of Governors (the Fed) and the Federal Reserve Bank of New York (the New York Fed), identified the Secured Overnight Financing Rate (SOFR) as its preferred replacement for USD LIBOR. When in doubt, please reach out and well be happy to assist. Think Prime or Fed Funds. 2023 Chatham Financial. This is the volume weighted median derived from the borrowing rates of actual repo transactions, or the cost of borrowing cash overnight collateralized by Treasury securities. 2. One interesting fact we came across is that the difference between a simple and compounded average of SOFR over the previous two decades would have only ranged from 0-10 bps. 242 0 obj <>/Filter/FlateDecode/ID[<6DACA7D458810A459BC26AC65F81BAB4><54CFAB6C6E517547A132413D56D7BEF2>]/Index[226 23]/Info 225 0 R/Length 82/Prev 146468/Root 227 0 R/Size 249/Type/XRef/W[1 2 1]>>stream hbbd``b`$g! The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams. Term SOFR is a proactive rate, meaning it moves in anticipation of a Fed hike. Since LIBOR is an unsecured lending rate and SOFR is a secured overnight rate, LIBOR has historically been higher than SOFR, so a spread adjustment is necessary to make SOFR more comparable. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. Since ISDA SOFR is meant to serve as a replacement for LIBOR, the difference between the two rates is minimal. This approach is consistent with market feedback and also the development of the SONIA- and SOFR . Clear as mud?What does this mean for me? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot. Is that delta enough to make a difference to a Borrower? As discussed in the User's Guide to SOFR, although compound interest will more accurately reflect the time value of money and will match the payment structure in derivatives and debt Below, we focus on Term SOFR and flag where the conventions are similar to LIBOR, and where they may differ slightly. Loans based on SOFR Average are technically using SOFR from the previous month, but since the rate is set in advance like LIBOR, borrowers still know their rate at the beginning of the period. Term rates SOFR is more technically Overnight SOFR (today, 0.05%) Term SOFR aka CME Term SOFR is a forward-looking rate based on SOFR futures (today, 0.27%) Overnight SOFR is a retroactive rate, which means it tends to move after a Fed hike. SOFR is also manipulated by the Federal Reserve, so in times of stress the Fed can force this rate to drop and keep the rate there. This week we cover SOFR Switch Accelerates; You've Got Custody! CME Term SOFR Reference Rates are: Endorsed by the ARRC Designed to adhere to the IOSCO Principles for Financial Benchmarks Compliant with Benchmark Regulations Sustainable Principles. The interest owed each day is calculated by applying the daily rate to both the principal borrowed and the accrued, unpaid interest. Chatham Financial has prepared the following resources: The New York Fed publishes the following SOFR rates each business day at 8 a.m. EST. Appendix 1. Also published daily: SOFR Averages (backward looking compound average of SOFR over rolling 30, 90 and 180 day periods). Overall, the more I look and think about the two rates, it seems like a bank is best positioned if it has both SOFR and BSBY exposure. The ARRC conventions recognize that either simple or compound interest can be charged when using SOFR in arrears. Maybe, if Borrowers notice that, traditionally, Term SOFR is overestimating Daily Simple SOFR, then Borrowers will move towards Daily Simple SOFR? In 2020, the ARRC published recommended "In Arrears" conventions for business loans. %%EOF Our economists engage in scholarly research and policy-oriented analysis on a wide range of important issues. Copyright 20192023 Loan Syndications & Trading Association. For more information, contact mcoffey@lsta.org, tvirmani@lsta.org or ehefferan@lsta.org. As part of our core mission, we supervise and regulate financial institutions in the Second District. The 1-month USD LIBOR forward curve represents market-implied future settings for 1-month USD LIBOR, an index rate used in many legacy floating-rate . In other words, new Term SOFR loans may almost be plug-and-play with LIBOR documentation and systems. Conversely, USD LIBOR relies primarily on expert judgment of the LIBOR panels submissions to calculate this rate. SOFR Average can also be used in arrears. This mismatch may increase the costs (i.e., increase the Fixed Rate) on a Term SOFR Swap, so that the Lender can capture some profit that will be used to cover risks associated with this mismatch. In order to provide the counterparties sufficient time to pay interest at the end of the period, several potential conventions are feasible (and are illustrated on p. 12 of . If you click on the link in the table above, you can access a page with the current rates. SOFR Rates For Dummies - A Helpful Overview in Layman's Terms, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/users-guide-to-sofr2021-update.pdf, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_SOFR_Synd_Loan_Conventions.pdf, https://www.newyorkfed.org/arrc/sofr-transition, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf. We should get more clarity on this point, and I would expect/hope it tracks those buyside parties exempt from the U.S. swap margin requirements. Background: The ARRCs Daily Simple SOFR and Daily Compounded SOFR in Arrears Conventions (published in July 2020) were complicated because these rates are not known in advance of the interest period and therefore many conventions differed from LIBOR conventions. Chatham's experts answer the most pressing questions asked by our clients about how the transition will affect them. The Secured Overnight Financing Rate (SOFR) forward curve represents the implied forward rate based on SOFR futures contracts. From an administrative standpoint, the main difference will be the reference to SOFR instead of USD LIBOR and the application of the Spread Adjustment to obtain a SOFR equivalent of an existing LIBOR margin. We help keep our clients up to date in these fast-moving areas and to serve as a thought leader. Monday, August 2, 2021. But it is also more volatile than LIBOR. The ARR does not support the use of the SOFR Term Rate for SOFR is a benchmark that financial institutions use to price loans for businesses and consumers. Some of the factors that impact supply and demand in the Treasury repo market are: The market dynamics of the Treasury repo market make daily spot SOFR more volatile than spot USD LIBOR. CME Term SOFR Reference Rates Benchmarks The CME Term SOFR Reference Rates benchmark is a daily set of forward looking interest rate estimates, calculated and published for 1-month, 3-month, 6-month and 12-month tenors. Yes. 0 O#5 Each business day, the New York Fed publishes the SOFR Averages and SOFR Index on the New York Fed's website, shortly after the SOFR is published at approximately 8:00 a.m. The smoothing effect is more evident as we increase the reference interest period. Alternatively, if we ever do see rates rise, then BSBY may be higher than an Adjusted SOFR agreed to during a low interest rate environment. A bit complex (collecting SOFR daily and aggregating simple interest for each interest period, lookback period needed) All types of loans Any lender with a team that can provide the sum . 2. and SOFR Averages. This is the compounded average of SOFR from the previous 30, 90, or 180 days. All rights reserved. Use of the Reference Rates are subject to important disclaimers, limitations and indemnification obligations. LIBOR, a reference rate for more than $300 trillion contracts globally and nearly $200 trillion U.S. dollar contracts, likely will end after 2021. Term SOFR Conventions: (Almost) Just Like LIBOR, Launch of ESG Integrated Disclosure Project, LSTA/Refinitiv Mark-to-Market Pricing Data, Morningstar LSTA Leveraged Loan Index Analysis, conventions for forward looking Term SOFR, Daily Simple SOFR and Daily Compounded SOFR in Arrears Conventions, Implementing the LIBOR Act: Federal Reserves Final Rule Podcast, LSTAs Sustainability Linked Loan Drafting Reference Documents Podcast, Register for The Corporate Lawyers Guide to Credit Agreements, The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Recent Sustainable Lending Updates Part 1, Updated LSTA Forms of Credit Agreement; Concept Documents, 2023 LSTA and LMA Joint London Conference, Cybersecurity, Privacy and Data Protection, Corporate Practice of Medicine Financings, Morningstar LSTA Leveraged Loan 100 Index Stats, Monthly Secondary Market Performance Charts (Feb 2023), The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Sustainability Linked Loans: Unpacking Sustainability Linked Loans, ESG Considerations and Avoiding ESG-washing Presentation, LSTA Requests Deadline Extension for Comments on the Conflicts of Interest in Securitizations Rule, Administrative Details Form (ADF) (Mar 2 2023), Morningstar LSTA Leveraged Loan Index Analysis (Feb 2023). The forward rate is simply the fixed leg of the swap. 7.2. As an extension of the Secured Overnight Financing Rate (SOFR), the SOFR Averages are compounded averages of the SOFR over rolling 30-, 90-, and 180-calendar day periods. For that reason, we put together a resource last year titled The Different SOFR Rates which includes a flowchart illustrating how the various rates relate. For more information on the SOFR Averages and Indexs publication schedule and methodology, see Additional Information about Reference Rates Administered by the New York Fed. March 2, 2023 - The FT recently commented that, as LIBOR deadline looms, leveraged borrowers and lenders are scrapping over the fine print as the, The SECs proposed Safeguarding Rule includes sweeping and transformative revisions to the current Custody Rule. Even if Term SOFR Swaps have a mismatch risk, and this risk impacts pricing, it could be the case that the pricing impact is minimal due to SOFR-liquidity already creating tighter spreads and lower pricing. Said another way, if the LIBOR rate for the August period was based on the 7/28/2022 LIBOR reset, then under ISDA SOFR the rate would not be available until 8/28/2022. Daily Simple SOFR means, for any day, SOFR, with the conventions for this rate (which may include a lookback) being established by the Administrative Agent in accordance with the conventions for this rate selected or recommended by the Relevant Governmental Body for determining "Daily Simple SOFR" for business loans; provided, that if the hbbd``b`y H0[lA7@B6H\u}_ > Because the Term SOFR is known in advance of the interest period, it is largely documented and operationalized like LIBOR. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve. This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors. to international institutions. The exact spread adjustments for Term SOFR, as recently locked-in by ISDA, are included in the definition of Benchmark Replacement. This page shows graphs and a table with information about the development of the SOFR interest rates in 2022. 4.30 %. In contrast, both "compound the rate" methodologies apply a calculated rate of daily compounded interest to principal and are highly conventions dependent. Existing LIBOR Loans that fall back to Term SOFR: For existing LIBOR loans that fall back from LIBOR to SOFR, there are just a few additional conventions. The New York Fed provides a wide range of payment services for financial institutions and the U.S. government. Term SOFR, USD LIBOR, and Treasury Forward Curves The Secured Overnight Financing Rate (SOFR) forward curve represents the implied forward rate based on SOFR futures contracts. What Is a REMIC and How Does It Play Into My Defeasance? Using a forward term rate for USD loans will result in a different market convention than in effect for Sterling loans, where the market convention is to use SONIA compounded in arrears. Term SOFR constitutes forward-looking estimates of overnight SOFR over tenors of one month, three months, six months and twelve months. Need to file a report with the New York Fed? Learn how to submit it. Think Prime or Fed Funds. For right now, maybe it is best to not put all your eggs into one basket. And the LSTAs Elliot Ganz explains how the revisions are, The panelists will discuss sustainability linked loans (SLLs) and the growing importance that SLLs play in advancing ESG considerations in the loan market. The New York Federal Reserve Bank now publishes SOFR daily, as well as SOFR Averages and a SOFR Index. A forward looking term SOFR may be constructed based on SOFR derivatives markets once those markets have developed enough liquidity. This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors. In short: BSBY will not have mismatch risk. Average SOFR, Simple Daily SOFR and Compounded SOFR The transition away from LIBOR benchmarks in financial markets, begun in 2017, accelerated in 2022, especially in the US. The table below shows the first, last, highest, lowest and average SOFR interest rate . Membership in the LSTA offers numerous benefits and opportunities. Which makes a degree of sense, as Libor itself is a term product. Average overnight rates can be calculated on either a simple interest basis or a compound interest basis. However, parties may prefer to use different periods of time to determine SOFR Compounded in Advance: Additional conventions will need to be developed around either Simple or Compound SOFR, including day count conventions and how the rate should be applied over weekends and holidays. If youre comparing a Compounded SOFR deal to a Term SOFR deal today, Term SOFR is 0.22% higher since it has already risen in anticipation of a March rate hike. Simple interest is calculated by applying the daily rate to the principal borrowed, and the payment due at the end is the sum of those amounts. Unlike USD LIBOR, SOFR is a fully transaction-based rate, and therefore, less susceptible to market manipulation and more attractive to regulators. Forward looking term SOFR rates are simply segments of an overnight SOFR-OIS curve that includes a fixed and floating leg. USD markets started transitioning from LIBOR to SOFR in 2017 after the FCA announced that LIBOR was at risk of discontinuation at the end of 2021. Alternatively, if the Borrower has no issues with managing the payment requirements of Daily Simple SOFR, then they may prefer this rate today. These features facilitate borrowers' cashflow and . I know banks tend to prefer hedging their portfolio of Borrower-facing swaps with cleared swaps, but if BSBY swaps are not clearable, this may or may not impact the adoption of BSBY. SOFR is now being used across the US structured finance market, a credit . I just have not seen or heard of too many Borrowers eager for an in-arrears rate. Our primary objective is to maintain a safe and competitive U.S. and global banking system. The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors. SOFR Average Graph and download economic data for Secured Overnight Financing Rate (SOFR) from 2018-04-03 to 2023-03-02 about financing, overnight, securities, rate, and USA. 226 0 obj <> endobj Unfortunately, it isn't that simple. Each of the SOFR compound in arrears and Daily Simple SOFR rates will be available in up to seven tenors in a variety of different forms in order to conform to convention in different markets. SOFR Index is based on the same calculation methodology as SOFR Average, so calculating the rate using the same start and end dates as SOFR Average should produce materially similar results. SOFR was selected by the Alternative Reference Rates Committee (ARRC) chaired by the New York Federal Reserve in 2017. Importantly, Term SOFR is a forward-looking set of rates just like LIBOR. Permit movement from daily SOFR to term SOFR - It is possible that term SOFR (the first level of the waterfall) will not exist at the time a SOFR-priced loan agreement is entered into, and the loans will thus be priced at a rate based on daily SOFR (the second level of the waterfall). 3 "SOFR" is more technically Overnight SOFR (today, 0.05%) "Term SOFR" aka CME Term SOFR is a forward-looking rate based on SOFR futures (today, 0.27%) Overnight SOFR is a retroactive rate, which means it tends to move after a Fed hike. Do you have a Freedom of Information request? However, the use case for Term SOFR in the derivatives market is (deliberately) very narrow. Whether youre using a compounded average set-in advance or set in arrears, interest rate hedges are available from several counterparties. Using SOFR as reported by the FRBNY and simple interest SOFR (Secured Overnight Financing Rate) is an interest rate published by the Federal Reserve Bank of New York. LIBOR and Term SOFR) set at the beginning of the interest period. *I have read and accept the terms of Chathams Privacy Policy. The CME Term SOFR Reference Rates benchmark is a daily set of forward-looking interest rate estimates, calculated and published for 1-month, 3-month, 6-month and 12-month tenors. The overnight financing part of its name references how SOFR sets rates for. By using this site, you agree to our updated Privacy Policy and our Terms of Use. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve. In fact, SOFR can be very closely modeled by the following simple regression $$$$ SOFR = {Survey\ Rate} + .38*(GCF - {Survey\ Rate} - .05) $$$$ Despite its simplicity, this regression has an R 2 of 99.8 percent (Figure 3). LIBOR vs. SOFR. There is a much more robust market supporting the calculation of SOFR. endstream endobj 2617 0 obj <>stream Use of the Reference Rates are subject to important disclaimers, limitations and indemnification obligations. Alternatively, if the Borrower has no issues with managing the payment requirements of Daily Simple SOFR, then they may prefer this rate today. I just have not seen much in Ameribor. The NY Fed publishes SOFR Averages here and 30D SOFR can be found on Bloomberg under ticker . H`RDH`0,"Ad:d,y$T ?/ 64 At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. If Small Banks are not qualifying as end-users, then I would expect them to prefer BSBY. Term SOFR could involve a credit adjustment spread being added to the benchmark rate (in particular for legacy loans switching to this methodology). The US secondary loan market hit its first speed bump of the year in late February. Keeping Them ApartOne challenge with the transition from LIBOR to alternative rates has been that SOFR is used as a catchall that can mean one of several things.