IHS Markit to publish daily credit spread adjustment for SOFR from Q2 2021
With less than a year until the anticipated end of many global interbank offered rates (IBOR), the Alternative Reference Rates Committee (ARRC) has recommended the Secured Overnight Financing Rate (SOFR) to replace USD LIBOR.
Since its emergence in 2018, some liquidity in SOFR-linked financial instruments has developed, but many legacy products and industry segments are struggling to adapt to the new rate.
As a leading index provider with a strong credit franchise, IHS Markit is well-positioned to help the industry overcome the challenges presented by SOFR – specifically by addressing the differences in a secured versus unsecured rate.
With this in mind, IHS Markit is developing a USD credit spread adjustment which utilises transaction data on commercial paper, certificates of deposit and corporate bonds issued by banking institutions. IHS Markit expects to deliver and publish the daily USD credit spread adjustment to the market beginning in the second quarter of 2021.
“In order to achieve a timely, smooth and successful transition to SOFR, some market participants will need an alternative mechanism to capture the dynamic credit component that is embedded within USD LIBOR,” says Julien Rey, executive director and global IBOR transition lead at IHS Markit. “Credit markets move independently of interest rates, at times in opposite directions, and in the post-LIBOR era, it will behoove banks and borrowers engaged in lending activity to include a credit spread adjustment that reacts in a timely manner to credit markets. The credit spread will help ensure lending activity does not veer too far off-market.”
IHS Markit will use an advanced adjustment methodology paired with robust and timely market data to deliver a successful credit spread. This approach complements the imperative to draw upon a deeper, more diverse data set; including additional institutions results in a more holistic view of the market and directly addresses concerns that looking only at the LIBOR Panel Banks will not be inclusive enough.
Additionally, dynamic thresholds ensure our methodology reacts to changes in funding behaviour programmatically and does not rely on arbitrarily selected rigid thresholds. Our fallback methodology is designed in a manner so that a credit spread will be published daily. The result: a robust and reliable credit spread adjustment that brings market participants the flexibility to apply a spread to the rate component of their choosing, such as compounded SOFR or a term rate.