HedgeTalk: Another Horse in the Race

By: John Trefethen, Director & Co-Founder

With the London Interbank Offered Rate (“LIBOR”) set to extinguish at the end of next year, the heir apparent replacement index is the Secured Overnight Financing Rate (“SOFR”). SOFR has come under scrutiny recently during periods of significant interest rate volatility where it has shown very little correlation with 3-month LIBOR. This caused the Federal Reserve (the “Fed”) in May of this year to back-off from using SOFR, and revert to LIBOR, for its $600 million Main Street Lending Program. Tradeweb Markets Inc. (“Tradeweb”) and the Intercontinental Exchange Inc. (“ICE”) have stepped-in to offer an alternative index in the form of a daily Treasury yield curve. The index would publish 11 tenors, maturities ranging from one month to 30 years, and the yields are based on transactions executed on Tradeweb’s institutional trading platform, which is among the biggest marketplaces for U.S. government debt. As opposed to Treasury quotes from the US government that show snapshots based on dealer prices, the Tradeweb/ICE Treasury yield curve is based on transactions made over the course of a trading day. The Tradeweb/ICE yields will go out to an additional third decimal place and will be published by 5:00pm New York time on each business day. Below is their published yield curve as of July 17, 2020.

Many believe that the Tradeweb rates offer potential benefits for market participants when compared to SOFR. They tout the product as more consumer friendly than SOFR. Timothy Bowler, president of the ICE Benchmark Administration has been reported to say that “a sequence of yields on Treasury securities is an easier concept for many borrowers to understand than benchmarks based upon repurchase rates or wholesale bank funding rates.” According to Tradeweb and ICE, the Treasury yield curve will comply with the principles for benchmark administration published in 2013 by the International Organization of Securities Commissions (“IOSCO”). Tradeweb/ICE has been testing the index for 18 months and are asking for stakeholder feedback by September 18, 2020 before finalizing their methodology. The New York Fed this month said it's SOFR index and averages are IOSCO compliant. SOFR is the index selected in 2017 by a committee convened by the US central bank to be the LIBOR replacement. But with rumblings in the marketplace of concerns with SOFR’s reliability in volatile markets, there may be an opportunity for the Tradeweb/ICE yield curve index to gain prominence in the race to replace LIBOR.