Bank of America, JPMorgan Enter Swaps Trade Tied to New Libor Replacement

Bank of America Corp. and JPMorgan Chase & Co. struck the first swaps trade tied to the Bloomberg Short Term Bank Yield index Friday, as Wall Street tests new benchmarks meant to help replace Libor.

The banks entered into a $250 million one-year basis swap with one side tied to BSBY, as the reference rate is known. The benchmark is constructed using aggregated and anonymized data based on transactions of commercial paper, certificates of deposit, U.S. dollar bank deposits and short-term bank bond trades, reflecting banks’ marginal funding costs. The other side of the swap is linked to the Secured Overnight Financing Rate.

Banks, barred from entering into new contracts tied to Libor beginning next year, have ramped up their efforts to prepare for its demise in recent months. While they’re planning to lean heavily on SOFR -- the Federal Reserve’s preferred replacement rate -- as an alternative benchmark for floating-rate instruments, market watchers say there’s room for others, particularly ones that include a credit component, which SOFR lacks.

BSBY is one of an array of contenders, including Ameribor and ICE’s Bank Yield Index, seeking to carve out a niche for themselves in the post-Libor landscape.

“We want to signal our support for credit-sensitive rates alongside SOFR,” said Sonali Theisen, head of fixed income, currencies and commodities electronic trading and market structure at BofA. “There’s a lot of work being done on having a rate that looks and feels like Libor.”

BSBY is administered by Bloomberg Index Services Limited, a subsidiary of Bloomberg LP, the parent of Bloomberg News.

For more on the transition away from Libor, subscribe to the Libor Countdown

BofA and JPMorgan say that the usage of other alternative rates won’t curtail efforts to facilitate the wider adoption of SOFR.

“We’re all focused on transitioning off dollar Libor as soon as possible,” said Thomas Pluta, global head of linear rates trading at JPMorgan. “This isn’t going to slow the SOFR transition down -- if anything, it’s going to accelerate it.”

The transaction comes roughly five months after the execution of the first Ameribor-linked interest-rate swap transaction, and more than two years after the first such trade tied to SOFR.

Earlier in April, Bank of America also issued a $1 billion six-month floating-rate note referencing the one-month BSBY index, according to a filing.

Overnight BSBY most recently printed at 0.077%, compared to 0.01% for SOFR and 0.096% for Ameribor.

Friday’s swap is “an important development in the market,” said Kavi Gupta, co-head of global rates trading at Bank of America. “We expect activity levels to pick up in the next quarter.”

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