Libor Replacements Multiply in Shift That Could Fracture Markets
May 24, 2021 | Alex Harris | Bloomberg
A slew of newer and lesser known reference rates are staking their claim to a share of the post-Libor landscape as the outlook for the space grows increasingly fractured.
Once largely considered afterthoughts in the race to replace the London interbank offered rate, a clutch of upstart challengers, from Ameribor and BSBY to ICE’s Bank Yield Index, have been gaining traction, or at least garnering more attention, in recent weeks. Their ascent comes as borrowers and bankers increasingly question whether the Federal Reserve’s long-preferred replacement, the Secured Overnight Financing Rate, is the best option for the multitude of markets that must ditch scandal-tainted Libor by year-end.
At the heart of the matter are two shortcomings that have long dogged SOFR: a lack of a forward-looking curve, and the absence of a credit component — both key features of Libor that the newer rates all offer. Wall Street, for its part, has already begun signaling some support for the lesser-known alternatives. But while multiple rates could help meet the needs of various business lines, they also risk making a complex transition even more difficult, while potentially slowing the build up of liquidity in any one benchmark.
