Libor alternatives continue to evolve

Alternatives to interbank offered rates offer advantages, but industry groups are still working on approaches to adjustments made when those alternatives are used as fall-back rates, panelists at the SIFMA Annual Meeting in Washington, D.C., said on Tuesday.

Christian Rasmussen, managing director at UBS Securities, said banks' declining amount of unsecured wholesale borrowing means the London interbank offered rate is “no longer a viable reference” on which institutions can base their trading. The Secured Overnight Financing Rate, meanwhile, is compliant with International Organization of Securities Commissions principles and is based on a repurchase-agreement market with “north of 700 billion daily transactions,” he said.

Jason Manske, senior managing director and head of global derivatives and liquid markets at MetLife, said the most liquid Libor rate pales in comparison.

“Do you want a rate that's based on actual transactions, or do you want a made-up rate?” he said.

In April, the International Swaps and Derivatives Association updated its 2006 Definitions with a floating-rate option to facilitate SOFR transactions in the markets for cleared and uncleared derivatives, said Ann Battle, assistant general counsel at ISDA.

“So we're doing a lot to facilitate adoption of SOFR going forward and then also, on the back end, address the risks that Libor or another key Ibor could be permanently discontinued in contracts that continue to reference it,” Battle said.

ISDA has proposed four approaches to adjusting risk-free reference rates when they are used as a fall-back for a non-overnight version of an Ibor, as well as three potential approaches to adding a spread to those risk-free rates to address factors such as bank credit risk.

The consultation will run through Oct. 12, and ISDA hopes to implement the adjustments in the 2006 Definitions sometime next year, Battle said.

“We will absolutely make transparent the equations for these adjustments,” she said.

Nadine Bates, senior vice president and treasurer at Fannie Mae, said legal contracts in many cases have allowed Fannie Mae to use a comparable alternative rate if the prevailing reference rate ceased to exist, although doing so “wasn't a simple task.”

Fannie Mae is now working with industry groups to ensure it uses “robust” fall-back language for its legacy contracts and for new products in order “to address any scenario,” Bates said.