Debt funds and LIBOR: so what the fuss

ICE Benchmark Administration (IBA), the organisation which currently administers the LIBOR screen based rates, has this morning unveiled a proposed new gauge called the US Dollar ICE Bank Yield Index. Detailed information can be found at: https://www.theice.com/iba/Bank-Yield-Index-Test-Rates.

The proposed new ICE index will measure the yields at which investors are willing to lend US dollar funds to international banks on a wholesale, unsecured basis, according to documents on the index. It’s aimed at meeting the short-term interest-rate benchmark needs of lenders, borrowers and other cash-market participants, with settings for one, three and six month periods. It is not an RFR but an alternative to USD LIBOR based upon rates for submitted for actual transactions. It is essentially a data-driven version of USD LIBOR. This is completely separate to the work that IBA is doing to produce term rates derived from RFRs.

The methodology paper benchmarks the level of this new index against USD LIBOR and they look to be very strongly correlated. In theory, you could do a straight swap between the two rates without needing to make any consequential amendments to payment mechanics etc. All you would need to do is tweak the margin and adjust the mechanics for looking up the rate. If the product in question is within the scope of the Benchmarks Regualtion, Supervised Entities (i.e., regulated entities) would also need to think about what fall-back rates would be appropriate to the extent that IBA might discontinue this index. 

IBA have said that the rate will be published “during the morning New York time” but on the basis of the curve produced for the previous business day, so there will be a one day lag.

 

Steven Burrows, lawyer at Fieldfisher, comments:These alternative rates will certainly be a welcome development for lenders and borrowers in the cash markets (i.e., loans and bonds) and they complement the work that ICE is already doing to create term rates derived from risk-free rates.

Counterparties in the cash markets have struggled to get to grips with the lack of a term structure for risk-free rates and having an alternative that has a term structure as well as being structurally and mechanically similar to existing IBORs could greatly simplify the migration of legacy products away from those rates. New business could also be originated without needing to re-work payment mechanics and infrastructure to work with risk-free rates.

However, many of these products will ultimately need to be hedged and it will remain to be seen whether derivative products will be created that reference these alternative rates, particularly given that the derivatives markets have already taken significant steps towards adopting risk-free rates without a term element.

For media commentary on IBOR Discontinuance please contact Chris Bond on 020 7861 4175 or chris.bond@fieldfisher.com

To speak to an IBORs lawyer please visit http://ibors.fieldfisher.com/fieldfisher-contacts/