There's a New Rival to Libor, Built by Those Who Oversee Libor

(Bloomberg) -- In the battle for benchmark supremacy, another potential contender has emerged to take on the London interbank offered rate.

ICE Benchmark Administration, the organization which currently oversees Libor, has outlined a possible successor to the scandal-tainted reference rate that underpins more than $200 trillion of dollar-denominated financial instruments. The unveiling of the proposed new gauge -- known as the U.S. Dollar ICE Bank Yield Index -- follows the launch last year of another alternative for dollar-denominated transactions, the Secured Overnight Financing Rate.

While Libor has historically been the most widely used benchmark, it faces “an uncertain future due to a reduction in the amount of transactional activity that has historically underpinned its determination,” ICE said in a paper outlining its new index. “These circumstances have prompted regulators to advocate for a transition.”

There's a New Rival to Libor, Built by Those Who Oversee Libor

One possible option is SOFR, which has the imprimatur of the Federal Reserve-backed Alternative Reference Rates Committee and has been touted as Libor’s heir-presumptive in the dollar market. Yet, while SOFR has gained some traction, observers have also voiced concerns about it, ranging from the benchmark’s tepid derivative volumes and lack of term structure to volatility risks.

The new ICE gauge has been designed to measure the yields at which investors are willing to lend U.S. dollar funds to large internationally active banks on a wholesale, unsecured basis, according to documents on the index. It’s aimed at meeting the short-term interest-rate benchmark needs of lenders, borrowers and other cash-market participants, with settings for one-, three- and six-month periods.

ICE Benchmark Administration is asking market participants and stakeholders to provide feedback about the rate and its methodology during the first quarter of this year, in anticipation of launching it in early 2020.

The creation of another option at this stage could, of course, simply add to complications, according to some observers. While one can complain about SOFR, it at least has the backing of regulatory bodies and market participants have already invested in the process, according to Blake Gwinn, a rates strategist at NatWest Markets.

“This just muddies the waters,” he said by phone. “If they released the rate six months ago it would be different, but everyone has already started to move down the SOFR path.”

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