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Illustration: Sarah Grillo/Axios

The lending world's slow move away from the Libor benchmark interest rate has been going on for more than a decade. But things are finally speeding up — with some investment banks planning to arrange new loans based on alternative benchmarks as soon as July, multiple sources tell Axios.

Why it matters: Banking regulators have been trying to phase out Libor since a 2008 rate-manipulation scandal, but it is still widely used in the U.S. The long transition has given rise to multiple replacement options, leaving borrowers and investors in limbo when making certain investment decisions.

Context: More than $200 trillion in global debt is currently Libor-based.

What’s new: “We're aware of one bulge bracket bank that has indicated an intention to stop offering their borrowers new Libor-based instruments after June 30 of this year,” Matt Hoffman, director at financial risk advisor Chatham Financial, tells Axios.

Of note: The bank in question said it prefers to move to BSBY (Bloomberg Short-term Bank Yield Index) as an alternative, but is willing to quote over SOFR (Secured Overnight Funding Rate), Hoffman says.

  • “We've heard from others active in our space that more banks are considering doing the same, and that we can expect to know more in coming weeks,” Hoffman adds.

Background: The Federal Reserve created the Alternative Reference Rate Committee (ARRC) in 2014 to shepherd the Libor transition. ARRC initially threw its heft behind SOFR, effectively an overnight risk-free rate.

  • But market participants have called for a forward-looking term — rather than overnight — benchmark. With a term rate, a borrower knows its debt service costs in advance, and can plan accordingly. It’s less volatile, and less complicated.
  • The market has also asked for a credit-sensitive — rather than risk-free — benchmark. The risk-free SOFR is backed by Treasuries, so banks that lend using SOFR could find themselves in an asset-to-liability mismatch in times of market stress. This could lead to a greater need for rate hedging.

ARRC on May 21 said it would, finally, “soon” make a formal recommendation that a Term SOFR be used in lending, administered by derivatives exchange CME Group.

Yes, but: In the meantime, other term and credit-sensitive alternatives have gained steam, including BSBY and Ameribor.

The big picture: Choice can be good. But a multi-benchmark environment would mean borrowers have to weigh a host of pros and cons each time they borrow – potentially without a perfect solution for all cases, Hoffman says.

  • For lenders, questions arise around liquidity and pricing, as well as balancing asset to liability management.

What to watch: The Fed has asked that loans issued after December 31 not be tied to Libor. By June 2023, all legacy Libor contracts must transition.

Go deeper

Dan Primack, author of Pro Rata
4 hours ago - Politics & Policy

Democrats' billionaires tax explained

Illustration: Aïda Amer/Axios

There is now legislative language behind the push to tax American billionaires on unrealized capital gains, as Sen. Ron Wyden last night released his 107-page plan.

Why it matters: This would be a sea change in U.S. tax policy, which has only applied to realized gains (otherwise known as income).

COP26 head warns Glasgow summit will be "harder than Paris"

Alok Sharma, U.K. COP26 president, in Milan on Sept. 30, 2021. Photo: Stefano Guidi/Getty Images

U.K. COP26 President Alok Sharma told reporters Tuesday that the upcoming talks in Glasgow, widely viewed as the last chance to avoid some of the worst consequences of global warming, will be extremely difficult.

Driving the news: Sharma sought to temper expectations and note that the agenda features some of the toughest items that negotiators have punted on at previous summits.

5 hours ago - World

Scoop: Blinken protests Israel settlements approval in "tense" phone call

Benny Gantz (L) and Tony Blinken. Photo: Jacquelyn Martin/Pool/AFP via Getty

Secretary of State Tony Blinken protested the decision to approve 3,000 new housing units in Israeli settlements in the occupied West Bank during a tense phone call on Tuesday with Israeli Defense Minister Benny Gantz, three Israeli officials tell me.

Why it matters: This is the first time new construction in the settlements has been approved since President Biden assumed office, and the Biden administration had been privately pressing the Israeli government not to proceed.