BSBY is based on commercial paper, certificate of deposit, U.S. dollar bank deposit and short-term bank bond transactions.
With all the regulator and market focus on SOFR as the LIBOR replacement of choice, it's easy to forget that there are other replacement rates vying for market attention. We've written about Ameribor and highlighted some of the recent developments in its adoption. For the most part, support for Ameribor has come from smaller Main Street banks looking for a credit-sensitive rate that more closely matches the unsecured basis on which they borrow funds.
On October 15, 2020, Bloomberg threw its hat into the ring with its Bloomberg Short Term Bank Yield Index (BSBY). After a couple of months of publishing the rate on an indicative basis, Bloomberg launched the rate on January 20, 2021, and announced in early March that the rate is available for use as a replacement benchmark rate.
BSBY is based on commercial paper, certificate of deposit, U.S. dollar bank deposit and short-term bank bond transactions. It is reported each business day at 8 a.m. Eastern Time to subscribers on their Bloomberg terminals in overnight, one-month, three-month, six-month and 12-month tenors. Unlike SOFR, there is no market-agreed spread adjustment. Instead, Bloomberg has published a white paper on its methodology for calculating its credit spread and term structure. BSBY is reportedly IOSCO compliant, as confirmed by an independent accounting firm. On May 3, 2021, Bloomberg announced on its news site (with typical disclosures) that Bank of America and JPMorgan Chase entered into the first BSBY basis swap, linked to SOFR.
That's a lot of progress in seven months. As of May 14, 2021, BSBY can also claim the title of first syndicated loan to market. Following on its first BSBY swap, Bank of America agented a $150 million revolving credit facility for Duluth Holdings Inc. It's relatively small as syndicated loans go, and the revolving nature of the facility will likely keep the amount funded at any given time lower, but it's a start that SOFR has yet to make.
It remains to be seen whether this will be the first of many BSBY syndicated loans or the only one. Anecdotally, there are reports that some big banks prefer this rate over SOFR and plan to make announcements in the coming weeks. If CME Group follows through on its March 24, 2021, announcement that it will launch trading in BSBY futures contracts by the third quarter of 2021, with cleared BSBY swaps by the fourth quarter, BSBY will have the support it needs to grow.
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