In the battle for benchmark supremacy, another potential contender has emerged to take on the London interbank offered rate (LIBOR).
ICE Benchmark Administration, the organization which currently oversees LIBOR, has outlined a possible successor to the scandal-tainted reference rate that underpins more than $200 trillion of dollar-denominated financial instruments. The unveiling of the proposed new gauge—known as the U.S. Dollar ICE Bank Yield Index—follows the launch last year of another alternative for dollar-denominated transactions, the Secured Overnight Financing Rate (SOFR).
While LIBOR has historically been the most widely used benchmark, it faces “an uncertain future due to a reduction in the amount of transactional activity that has historically underpinned its determination,” ICE said in a paper outlining its new index. “These circumstances have prompted regulators to advocate for a transition.”
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One possible option is SOFR, which has the imprimatur of the Federal Reserve-backed Alternative Reference Rates Committee and has been touted as LIBOR's heir-presumptive in the dollar market. Yet, while SOFR has gained some traction, observers have also voiced concerns about it, ranging from the benchmark's tepid derivative volumes and lack of term structure to volatility risks.
See also:
- LIBOR's Heir Presumptive Prepared to Take on Bank Bond Market
- LIBOR's 2021 Demise Means More Work for Treasury
- SONIA Gets Clean Sweep in 2019 Sterling Bonds
- SONIA Is Too Complex
The new ICE gauge has been designed to measure the yields at which investors are willing to lend U.S. dollar funds to large internationally active 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.
ICE Benchmark Administration is asking market participants and stakeholders to provide feedback about the rate and its methodology during the first quarter of this year, in anticipation of launching it in early 2020.
From: Bloomberg
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