Bloomberg consults on BSBY cessation

Credit-sensitive Libor replacement faces 12-month run-off after damning Iosco verdict

Bloomberg is consulting on a plan to shut down its short-term bank yield index, known as BSBY, after an international standard-setter warned in July that credit-sensitive alternatives to the secured overnight financing rate (SOFR) do not meet global index standards.

In a statement issued today (September 13), the index provider requested feedback on a proposal to cease publishing the benchmark following a review of commercial opportunities.

“We designed BSBY as a cost-of-funding benchmark for lending markets, and we have a high degree of confidence in the quality of our methodology and calculation,” says a Bloomberg spokesperson. “However, BSBY’s usage within financial products is limited, and following a review of the commercial opportunities for BSBY, we have launched this consultation to provide clients the opportunity to provide feedback on the proposed cessation.”

The proposal would see Bloomberg Index Services Limited continue to publish the rate for a further 12 months, while restricting its use in new products.

BSBY’s usage within financial products is limited

Bloomberg spokesperson

Bloomberg launched its credit-sensitive benchmark in March 2021 in response to widespread demand for lending benchmarks that incorporate the bank funding element inherent in Libor but lacking in SOFR, the regulators’ preferred successor to US dollar Libor.

However, BSBY was viewed sceptically by regulators, including Securities and Exchange Commission chair Gary Gensler. The final blow was dealt on July 3, when the International Organization of Securities Commissions called on auditors to refrain from “any representation” that credit sensitive rates (CSRs) were compliant with international benchmark standards.

Iosco concluded that CSRs such as BSBY were underpinned by wholesale unsecured bank funding markets that are “not sufficiently deep, robust and reliable” to support Libor alternatives. It warned that continued use of the benchmarks “may threaten market integrity and financial stability”.

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Bloomberg initially pushed back against the finding, publishing data showing that the aggregate daily volume of transactions used to calculate BSBY totalled more than $400 billion in 2022. Following publication of the Iosco statement, Umesh Gajria, global head of index-linked products at Bloomberg, told Risk.net the provider had a “high degree of confidence in the quality of our methodology”, which received third-party attestation from EY of its compliance with the international benchmark standards.

But adoption of BSBY has continued to slow, with just $24 billion of syndicated loans referencing the benchmark and negligible derivatives activity. After the release of Iosco’s report, traded BSBY swaps notional fell to low single-digit millions of dollars in July and August, having traded $72 million in June, data from Clarus Financial shows.

As part of its consultation, Bloomberg is assessing the size and maturity profile of products currently tracking different BSBY tenors and the fallback arrangements that would be triggered by a cessation event.

The consultation will close on October 13.

A cessation of the rate would also see CME delist BSBY futures contracts, which had open interest of 7,650 contracts as of September 12. Both CME and LCH currently offer clearing for BSBY swaps out to 11 years.

The future of other aspiring CSRs remains uncertain. The American Financial Exchange continues to offer its Ameribor rate, focusing on smaller regional banks. SOFR Academy, which commercialised the ‘across-the-curve credit spread index’, or Axi, for publication by Invesco Indexing, is also seeking to expand outside of the US market. In June, two UK academics published a methodology for a euro-denominated Axi benchmark. Earlier this week, two academics from Keio and Seikei universities in Japan published a feasibility study for a yen version of the rate.