Term SOFR Conventions: (Almost) Just Like LIBOR, Launch of ESG Integrated Disclosure Project, LSTA/Refinitiv Mark-to-Market Pricing Data, Morningstar LSTA Leveraged Loan Index Analysis, conventions for forward looking Term SOFR, Daily Simple SOFR and Daily Compounded SOFR in Arrears Conventions, Implementing the LIBOR Act: Federal Reserves Final Rule Podcast, LSTAs Sustainability Linked Loan Drafting Reference Documents Podcast, Register for The Corporate Lawyers Guide to Credit Agreements, The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Recent Sustainable Lending Updates Part 1, Updated LSTA Forms of Credit Agreement; Concept Documents, 2023 LSTA and LMA Joint London Conference, Cybersecurity, Privacy and Data Protection, Corporate Practice of Medicine Financings, Morningstar LSTA Leveraged Loan 100 Index Stats, Monthly Secondary Market Performance Charts (Feb 2023), The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Sustainability Linked Loans: Unpacking Sustainability Linked Loans, ESG Considerations and Avoiding ESG-washing Presentation, LSTA Requests Deadline Extension for Comments on the Conflicts of Interest in Securitizations Rule, Administrative Details Form (ADF) (Mar 2 2023), Morningstar LSTA Leveraged Loan Index Analysis (Feb 2023). SOFR measures of the cost of borrowing cash overnight collateralized by Treasury securities. There are four different types of SOFR that may be used in loan agreements: (i) daily simple SOFR in arrears, (ii) SOFR compounded in arrears, (iii) SOFR compounded in advance, and (iv). The CME Term SOFR Reference Rates benchmark is a daily set of forward-looking interest rate estimates, calculated and published for 1-month, 3-month, 6-month and 12-month tenors. For more resources or help, check out Pensford.com/SOFR or give us a shout. SOFR activity is demonstrably different to Fed Funds activity. However, it is still uncertain what liquidity will look like in the Dealer-to-Dealer Market, which impacts pricing. 2. and SOFR Averages. %%EOF But at the same time, it would also lag Term SOFR in a decreasing rate environment. The ARRC recommended the Secured Overnight Financing Rate (SOFR) as the preferred alternate to USD LIBOR. In 2020, the ARRC published recommended "In Arrears" conventions for business loans. The SOFR is calculated as a volume-weighted median of transaction-level tri-party repo data collected from the Bank of New York Mellon as well as GCF Repo transaction data and data on bilateral Treasury repo transactions cleared through FICC's DVP service, which are obtained from the U.S. Department of the Treasurys Office of Financial Research (OFR). While the ARRC Conventions cover both compounded and . The Term SOFR Rate: CME Term SOFR is the ARRC-recommended Term SOFR rate; it is available in 1M, 3M and 6M tenors via CME DataMine, CME's Market Data Platform (MDP), and data redistribution partners such as Bloomberg and Refinitiv. Alternatively, if the Borrower has no issues with managing the payment requirements of Daily Simple SOFR, then they may prefer this rate today. The mission of the Applied Macroeconomics and Econometrics Center (AMEC) is to provide intellectual leadership in the central banking community in the fields of macro and applied econometrics. I know banks tend to prefer hedging their portfolio of Borrower-facing swaps with cleared swaps, but if BSBY swaps are not clearable, this may or may not impact the adoption of BSBY. SOFR (Secured Overnight Financing Rate) is an interest rate published by the Federal Reserve Bank of New York. The forward rate is simply the fixed leg of the swap. (Term SOFR being step 1 in the replacement rate waterfall) upon a certain number of publicly available USD-denominated syndicated credit agreements being originated with, or switching over to, a SOFR-based rate. Watch Chatham's Managing Partner and Chair, Amol Dhargalkar, discuss key trends for the upcoming quarter like inflation, market volatility, and LIBOR transition. By continuing to use our site, you agree to our, Agency Commercial Mortgage-Backed Securities, Foreign Reserves Management Counterparties, Central Bank & International Account Services, International Services, Seminars&Training, Additional Information about Reference Rates Administered by the New York Fed. There are approximately $900 billion of actual daily market transactions supporting the daily calculation of SOFR. Not only does it more closely match their cost of funds, but (1) they will want a 1-for-1 match and (2) they likely will not have systems in-place to confirm any compounded in-arrears calculation or otherwise just prefer to not have cash flow management based on this sort of floating rate calculation. Alternatively, if the Borrower has no issues with managing the payment requirements of Daily Simple SOFR, then they may prefer this rate today. Lastly, if SOFR swaps have a clearing requirement, and BSBY swaps are never cleared, this could greatly impact the market too. 2612 0 obj <> endobj hbbd``b`$g! Initial Term Loans means the term loans made by the Lenders on the Closing Date to the Borrower . The SOFR includes all trades in the Broad General Collateral Rate plus bilateral Treasury repurchase agreement (repo) transactions cleared through the Delivery-versus-Payment (DVP) service offered by the Fixed Income Clearing Corporation (FICC), which is filtered to remove a portion of transactions considered specials. SOFR benefits from the ARRCs support and the CFTCs SOFR First best practices, which should promote the growth on a SOFR swaps market. to international institutions. All rights reserved. The ARRC conventions recognize that either simple or compound interest can be charged when using SOFR in arrears. SOFR is a reference rate (benchmark rate) and an alternative to the US Dollar LIBOR rate. I am not sure non-term rates will have much use in the loan market, today. While LIBOR and SOFR historically trend together, LIBOR is generally higher than SOFR. With all that said, people much smarter than me have very likely already thought this one through and can discuss forward looking curves for both rates. Term SOFR, BSBY or one of the other SOFR rates? April 23, 2019 - On April 22nd, the Alternative Reference Rates Committee (ARRC) released A Users Guide to SOFR, which discusses the likely end of LIBOR, what it means for cash products, and how cash product consumers (such as syndicated lenders or borrowers) might think about the different variants of SOFR. Other forms of SOFR, including use of SOFR in advance or, if available, a SOFR term rate, would tend to have conventions similar to current LIBOR conventions. hb```@(Q$ ?$sQbr When a CMBS loan is originated, its common to then securitize that loan, which is the conversion A slightly irreverent take on interest rate markets and the economy. 242 0 obj <>/Filter/FlateDecode/ID[<6DACA7D458810A459BC26AC65F81BAB4><54CFAB6C6E517547A132413D56D7BEF2>]/Index[226 23]/Info 225 0 R/Length 82/Prev 146468/Root 227 0 R/Size 249/Type/XRef/W[1 2 1]>>stream The exact amounts that should be added to one-month, three-month and six-month SOFR contracts (whether of the Daily Simple, Daily Compounded, or Term SOFR variety) using this method are 0.11448%, 0.26161%, and 0.42826%, respectively. The compounded SOFR credit agreement also references a compounded average of SOFR calculated in arrear using the "look-back" method, and contains optional language for the transition to a forward-looking term SOFR, once available. Yes. That could be helpful information for a lending desk when talking to Borrowers. Daily Volume $500 Million (3-month LIBOR) (estimated) Nearly $1 trillion (high correlation to T-Bills) 769 0 obj <>/Filter/FlateDecode/ID[<0A16976CAFCF2F4BAF285B5543FF241D>]/Index[751 27]/Info 750 0 R/Length 99/Prev 566604/Root 752 0 R/Size 778/Type/XRef/W[1 3 1]>>stream SOFR Compounded in Advance is known in advance, so lookbacks and lockouts are not necessary. Therefore, over a period of a few years wed anticipate the difference to average out such that a borrower is largely indifferent between one index and another. Is that delta enough to make a difference to a Borrower? Use of the Reference Rates are subject to important disclaimers, limitations and indemnification obligations. The Center for Microeconomic Data offers wide-ranging data and analysis on the finances and economic expectations of U.S. households. Said another way, if the LIBOR rate for the August period was based on the 7/28/2022 LIBOR reset, then under ISDA SOFR the rate would not be available until 8/28/2022. Simple interest may be computationally easier; compound interest is the more economically correct convention and will allow for more accurate hedging. How is Daily Simple SOFR used to calculate interest? The Economic Inequality & Equitable Growth hub is a collection of research, analysis and convenings to help better understand economic inequality. 4.30 %. Is that delta enough to make a difference to a Borrower? There will be a mismatch here. *I have read and accept the terms of Chathams Privacy Policy. First, if these loans use hardwired fallbacks, they will apply an ARRC spread adjustment to minimize the difference between LIBOR (a generally higher, unsecured rate) and SOFR (a generally lower, secured rate). Need to file a report with the New York Fed? Unlike LIBOR, SOFR is a secured overnight rate, not a forward looking term rate. If that is the case, maybe the Fixed Rate of the Borrowers swap is agnostic to whether the Floating Rate is BSBY or Term SOFR? Note that specials are repos for specific-issue collateral, which take place at cash-lending rates below those for general collateral repos because cash providers are willing to accept a lesser return on their cash in order to obtain a particular security. The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry. Also published daily: SOFR Averages (backward looking compound average of SOFR over rolling 30, 90 and 180 day periods). Read more about Agency SOFR caps here. hb```f``jf`a`z @1V 0;C CDk P%uf qGsGRGCx||`sQ(x11KV,,,B,YLq 2f;O2$ Chatham's experts answer the most pressing questions asked by our clients about how the transition will affect them. Term SOFR is eligible for use in general business loans (in contrast to the much narrower use cases for Term SONIA or any STR1 -based forward-looking term rate). Lenders may want to start to compare how BSBY vs Adjusted Term SOFR Rate compare. This week we cover SOFR Switch Accelerates; You've Got Custody! SOFR Rates For Dummies - A Helpful Overview in Layman's Terms, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/users-guide-to-sofr2021-update.pdf, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_SOFR_Synd_Loan_Conventions.pdf, https://www.newyorkfed.org/arrc/sofr-transition, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf. In addition, Daily SOFR is calculated in arrears (backward-looking), which creates operational differences from forward-looking rates (e.g. Honestly, all these talking points about BSBY apply similarly to any other CSR such as Ameribor, but at this point it seems like other CSRs are not picking-up, which also means it is more likely they will have a higher cost to hedge. Daily Simple SOFR means, for any day, SOFR, with the conventions for this rate (which may include a lookback) being established by the Administrative Agent in accordance with the conventions for this rate selected or recommended by the Relevant Governmental Body for determining "Daily Simple SOFR" for business loans; provided, that if the 3 Introducing the New York Innovation Center: Delivering a central bank innovation execution. SOFR Index is based on the same calculation methodology as SOFR Average, so calculating the rate using the same start and end dates as SOFR Average should produce materially similar results. As expected, on July 28 , 2021, the Alternative Reference Rates Committee (ARRC) formally recommended the CME's SOFR Term Rate. SOFR Index is used to calculate the compounded average of SOFR over a custom time period. Alternatively, if the Borrower has no issues with managing the payment requirements of Daily Simple SOFR, then they may prefer this rate today. The SOFR Term Rate is known in advance of . We have prepared an overview of some of the leading credit-sensitive alternative benchmarks. ET. Thanks For Clearing That UpBut what about Compounded SOFR (aka NY Fed) or simple average SOFR you ask?