Investors weigh options as LIBOR transition draws closer
Institutions and investors are continuing to prepare for the transition away from the London Interbank Offered Rate (LIBOR), the world’s most commonly used benchmark for short-term adjustable rates that is currently expected to be discontinued by June 2023. Over the past several months, the Federal Reserve’s preferred benchmark replacement, the Secured Overnight Financing Rate (SOFR), has drawn increasing scrutiny from investors, giving rise to new potential benchmark challengers. Calculated as the median of rates that market participants pay to borrow cash on an overnight basis using Treasurys as collateral, SOFR lacks basic features embedded in the LIBOR structure. Investor concerns surrounding SOFR as currently constructed are encapsulated by two shortcomings: the lack of a forward-looking curve and the absence of a credit-sensitive component in the new index. Borrowers and lenders have both expressed interest in benchmark alternatives that better serve their needs and address the aforementioned SOFR deficiencies. Two potential benchmark replacements, Ameribor and the Bloomberg Short-Term Bank Yield Index (BSBY), are both forward-looking and credit-sensitive and have been gaining traction in recent weeks, suggesting SOFR as LIBOR’s sole replacement is far from a foregone conclusion. While it is certain that LIBOR will transition at some point in the near term, the benchmark’s most suitable replacement remains a hotly debated topic amongst investors and regulators for months to come.