Technology vendor of the year: Bloomberg

Risk Awards 2022: Data giant delivered risk analytics, while playing key role in Libor transition

Jose Ribas
Jose Ribas, Bloomberg

Having your software on the desks of more than 300,000 finance professionals brings both opportunity and obligation. In the multi-year project to decommission Libor – the market’s most popular interest rate benchmark – the obligation came first.

Bloomberg customers who were using the platform for a varied range of pricing and other functions wanted to continue doing so as new risk-free rates (RFRs) were introduced, as fallbacks were signed – allowing firms to automatically re-hitch instruments to new rates following Libor’s demise – and as spreads were set between Libor and its replacements.

“Delivering these things was not optional,” says Jose Ribas, global head of risk and pricing solutions at Bloomberg in London. “We have major banks in the US and Europe that use us for structured notes and exotics, for example, and they needed their front-office trader workflow updating, their price verification workflow updating. Counterparty and market risk – all these models had to be updated at the same time so firms could keep running the books, keep running the business.”

Other customers and use-cases varied – from insurance companies calculating margin requirements, to non-financial corporates that use Bloomberg for hedge accounting or asset/liability management.

This work was non-negotiable, but required a huge effort on the vendor’s part. Ribas estimates the transition project occupied between a fifth and a third of his team globally over the past couple of years. He adds that “tens” of this team had little or no holiday over the 2021 year-end period, as they were on call to help clients with any problems as publication ended for the bulk of Libor fixings, and fallbacks took effect.

In this respect, Bloomberg was in the same boat as other fixed-income pricing and analytics vendors. The firm wins this year’s technology vendor of the year category for demonstrating that it is not just another pricing and analytics firm – or, for that matter, just a market data vendor or benchmark administrator. It is all three and, at times, the firm’s complementary businesses amount to much more than the sum of those parts.

The opportunity that arose from the Libor transition is one illustration, as clients grappled with one of the project’s thornier challenges: the fact that RFRs are overnight rates, lacking the bank credit risk component that was embedded in Libor. For many market participants, this was not a problem; they were content to compound the overnight rate to generate term versions of the RFRs. Others wanted not just a term benchmark, but one that would move in line with the credit cycle.

Some of these latter firms turned to Bloomberg for help, says Umesh Gajria, the firm’s global head of index-linked products. He describes Libor as being so “deeply integrated into client systems and products” that removing and replacing it was like an archaeological dig – the old artefacts had to be carefully exhumed, rather than gouged out of the earth.

“Going back to my archaeological site example, when we dug into a certain area – the cash market – clients would ask us, ‘Hey, can you provide a solution for a rate that has credit sensitivity built into it?’ So that caused us to go back to the drawing board, and we realised there was a decent-sized set of clients that were facing an important problem,” says Gajria.

The size of that problem was a point of heated debate during transition. Regulators wanted liquidity to build quickly in the RFRs, and only reluctantly endorsed work that would create offshoots or separate benchmarks. In some markets, the issue barely raised its head; in others it sparked a mini-revolt.

Lenders were seen as most reluctant to give up Libor’s credit-sensitivity, warning that in periods of financial stress, bank funding rates and RFRs would decouple and move in opposite directions. To compensate themselves for this risk, bank lenders using the RFRs today tack on an additional spread.

Gajria insists credit-sensitivity isn’t just a benefit for lenders, though.

“I think a number of borrowers want a simple solution in terms of understanding what the cost of their loan is. If you’re borrowing against an RFR benchmark today, your all-in cost consists of a rate – a base rate – plus an add-on spread that covers the potential cost of funding for the bank, and a credit spread that is based on the client’s own risk profile. So now you’ve got three components – something the market wasn’t necessarily used to,” he says.

Bloomberg’s alternative is BSBY, short for Bloomberg Short-Term Bank Yield Index. The benchmark – now approaching its first birthday – is based on wholesale funding transactions on the company’s electronic platforms, plus firm quotes from banks. Regulators have insisted that any Libor replacement is grounded in real-world transactions – so BSBY’s quote data is scaled down and capped to avoid drowning out the trade data.

Umesh Gajria
Lori Hoffman/Bloomberg
If banks know their cost of funding is covered, then they can give the best price. If they don’t know what they’ll be paying for funding three months from now, 12 months from now, then the add-on spread will obviously need to cover it

Umesh Gajria, Bloomberg

This is a simpler benchmark for borrowers, Gajria argues – there’s no need for banks to tack on a funding spread, because the rate should rise or fall in line with their cost of funds. As a result, he claims, it should also be cheaper.

“If banks know their cost of funding is covered, then they can give the best price. If they don’t know what they’ll be paying for funding three months from now, 12 months from now, then the add-on spread will obviously need to cover it. That spread may be needed in a crisis, but why would the borrower want to pay for it upfront and throughout the duration of the loan?” he asks.

BSBY has generated a lot of controversy during its short life. Just months after its launch, the chair of the US Securities and Exchange Commission (SEC), Gary Gensler, warned the trading volumes that underpin the benchmark are a fraction of those behind SOFR, the official replacement for US dollar Libor. Then, last September, Gensler renewed his attack, claiming BSBY did not comply with global benchmark standards. The UK’s Financial Conduct Authority followed up by warning that the rate’s contractual fallbacks – a waterfall of measures that lay out what will happen to the benchmark if underlying transaction volumes dwindle – were not sufficiently robust to satisfy local benchmark rules.

In November, Bloomberg amended the fallbacks. Gajria says this was not a response to regulatory criticism: “It was not a response to anything or anyone. One of the drivers was essentially to make the fallbacks more resilient, but that was always part of our plan.”

The regulatory broadsides now seem to have abated. Gajria says he hasn’t heard anything recently, and suggests the initial opposition to BSBY may have had more to do with regulators’ desire to build liquidity in the RFRs than any fundamental opposition to the arrival of credit-sensitive alternatives such as BSBY.

“I think a multi-rate environment is not necessarily something they were against. In SOFR adoption, we were coming down to the wire – it was not where it could have been or should have been. But now we’re in a good spot as a market, the world has moved on with SOFR – and I think that’s a positive for the market,” he says.

BSBY’s initial role has been as a benchmark in bilateral commercial lending, where public data is scarce – Gajria says only that “some banks” are using the rate in these transactions – but it has also been used in some larger, public deals, including a $2.3 billion loan in September to trucking firm Knight-Swift Transportation. BSBY swap volumes are also growing, with roughly $20 billion notional traded so far this year – a fivefold jump on 2021 volumes, Gajria says.

The benchmark may add more strings to its bow. Gajria says “about a dozen” different use-cases have come to light – for example, some asset managers have enquired about using BSBY to benchmark the returns they get from cash investment, instead of Libor. Insurers have also asked about using BSBY to discount their liabilities, he adds.

Beyond Libor, Bloomberg has also been prominent in a host of other pressing issues. The firm was considered for this award, after winning three categories in Risk.net’s separate awards for technology vendors, including one for Libor support, and another for its market liquidity risk software, LQA.

Brad Foster
Brad Foster, Bloomberg
Lori Hoffman/Bloomberg

The latter was initially embraced as funds sought to comply with the SEC’s new rules on liquidity classification of their holdings, says Bradley Foster, head of enterprise content at Bloomberg. Usage has since shifted from mostly regulatory compliance to include a broader set of risk measurement and management challenges – a development that augurs well for the industry, given the general consensus that markets will be choppier this year and liquidity may be thinner.

“If you had asked me 18 months or two years ago how well-equipped the industry was, then I might have had a different response, but I think today, they are very aware of it. We’ve had a multi-year regulatory push on the topic, as well as these companies with very public liquidity issues,” he says – an apparent reference to blow-ups at the Woodford Equity Income Fund and a range of bond funds at Swiss manager, GAM.

“So, many firms have moved away from a subjective assessment of liquidity to taking a data-driven approach to assessing what liquidity risk is,” adds Foster.

That data-driven approach is woven into other important regulatory initiatives, such as the Fundamental Review of the Trading Book, which ties capital relief directly to the depth of data underpinning bank models, and the extent to which modelling results are consistent between the front office and the risk function. This context is pushing more customers in Bloomberg’s direction, Foster claims, although the firm offers no numbers to back this up, citing company policy.

“People are realising it’s extremely expensive to acquire, ingest and normalise data, then to build interoperability between different data sets, and finally to apply analytics on top of it all. They’re also realising that, even when you incur that cost, you’re not certain that you have a best-in-class product. We’ve built a vast stable of regulatory products, we’ve done this so many times before. We understand the pain points, and we can bring product to market pretty quickly,” he says.

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