International: Boats against the current? Credit-sensitive rates after LIBOR

22 Aug 2023    1 minute read
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In brief

Two credit-sensitive USD interest rates have been dealt a severe blow. The International Organization of Securities Commissions (IOSCO) has issued a statement expressing that the administrators of the Bloomberg Short-term Bank Yield Index (BSBY) and Ameribor should refrain from representing that such rates comply with the IOSCO Principles for Financial Benchmarks.

It is too early to tell whether the IOSCO statement tolls the death knell for BSBY, Ameribor and other USD credit-sensitive rates, although it may well inhibit the use of such rates.

The US Adjustable Interest Rate (LIBOR) Act of 2021 ("US LIBOR Act") permits US banks to use such rates, even if they do not comply with the IOSCO Principles.

Contents

  1. Key takeaways

Key takeaways

  1. Two credit-sensitive USD interest rates that compete with SOFR in the US loan market have suffered a significant recent setback. IOSCO has issued a statement expressing that the administrators of BSBY and Ameribor should refrain from representing that such rates comply with the IOSCO Principles for Financial Benchmarks.
  2. IOSCO's statement may well inhibit the use of BSBY and Ameribor. Market participants look to IOSCO for guidance even though IOSCO is not a regulator and the US does not have a benchmark regime that is similar to the benchmarks regulations in effect in the EU and the UK, which reflect the IOSCO Principles.
  3. IOSCO's criticisms of BSBY and Ameribor echo concerns raised by US and UK regulators, such as the following:
    1. The reliance of such rates on the bank commercial paper (CP) and certificate of deposit (CD) markets renders them noncompliant with the IOSCO Principles, because such markets are not deep, robust or reliable enough to underpin these rates as financial benchmarks in compliance with the IOSCO Principles.
    2. Such rates repeat the "inverted pyramid" problem to which LIBOR was subject.
  4. It is too early to tell whether the IOSCO statement tolls the death knell for BSBY, Ameribor and other USD credit-sensitive rates (CSRs). Some lenders have indicated a preference for rates that reflect counterparty credit risk, like BSBY and Ameribor. The US LIBOR Act permits US banks to use such rates, even if they do not comply with the IOSCO Principles for Financial Benchmarks.
  5. In addition to regulatory issues, BSBY and Ameribor face competition from SOFR and other products that do not refer to the CP and CD markets.

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Contact Information
Mark Tibberts
Partner
New York
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mark.tibberts@bakermckenzie.com
Caitlin McErlane
Partner
London
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caitlin.mcerlane@bakermckenzie.com
Matthew Smith
Counsel
New York
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matthew.smith@bakermckenzie.com
John Lawlor
Attorney
Chicago
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john.lawlor@bakermckenzie.com

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