Early Market Reception to Risk-Free Rates

What are some of the factors slowing the switch to risk-free rates?

• How the new rates will actually work over time
• Will contracts and documentation need to be updated or novated?
• Will consent solicitations be required?
• How will differences between UK and New York law play out?
• How will the market take to a switch from forward-looking to backward-looking rates?
• How will the switch to risk-free rates affect funding levels?

What were the objections to SOFR expressed by a group of mid-sized US banks in February 2020?

• The one size fits all approach may not be the most appropriate
• SOFR is an appropriate benchmark for larger banks that have access to collateral and the ability to operate across secured markets
• Many smaller banks do not have large holdings of US government securities so can only borrow on an unsecured basis creating an asset-liability mismatch
• Multiple reference rates will pave the way for a smooth transition away from Libor.
• Ameribor, an interest-rate benchmark derived from the weighted average of actual unsecured transactions on the American Financial Exchange, represented a more appropriate benchmark

What will help issuance of debt, issuance linked to RFRs or referencing RFRs?

• Issuers get more comfortable with issuing RFR-linked deb
• Trade bodies and service providers launch new tools
• New products are rolled out
• New structures are inaugurated