Multiple, competing Libor replacements are gaining momentum on both sides of the Atlantic.
The clock is ticking. The tainted London Interbank Offered Rate (Libor), plagued by a rate-fixing scandal, is set to expire on June 30, 2023. Banks have to find alternative benchmarks to be able to offer their customers corporate loans, mortgages and interest-rate derivatives. Among the plethora of potential replacements, which will take hold?
In the US, several are gaining momentum, especially the Secured Overnight Financing Rate (SOFR). Although Libor relies on estimated borrowing rates set by the trading desks, SOFR is based on actual transactions in the repurchase market and borrowers post reassuring collateral, such as US Treasuries. Major institutions like JPMorgan Chase and Bank of America have adopted the new option, which is telling. In July, an average volume of $2.55 trillion of futures and options contracts tied to SOFR changed hands daily, according to exchange operator CME Group. One year earlier, it was just $151.55 billion. SOFR is becoming dominant.
Still, some midsize banks prefer yet another benchmark. Two years ago, 10 CEOs of regional banks wrote a letter to the Fed, explaining their reluctance to use SOFR. They don’t have significant holdings of Treasury bonds to post as collateral; they would instead borrow on an unsecured basis. For them, other instruments have been created. In 2021, market data and analytics company Bloomberg launched its Bloomberg Short Term Bank Yield, which tracks transactions on its trading platform. Then there is Ameribor, linked to the American Financial Exchange (AFX). Its rates depend on the transactions on the AFX electronic platform. The 10 bankers, members of the AFX, wrote that a “one-size-fits-all approach may not be appropriate.”
Indeed, on the other side of the Atlantic, European institutions created their alternative benchmark. The Euro Short-Term Rate (€STR) is favored by European banks when they engage in short-term unsecured lending. The European Central Bank calculates the rate, relying on the statistics of the 50 largest banks in the eurozone. The UK naturally prefers its own Sterling Overnight Index Average (Sonia). Meanwhile, Switzerland has its Swiss Average Rate Overnight (Saron), and Japan created the Tokyo Overnight Average rate (TONA).