JPM on ICE Bank Yield Index
J.P. Morgan Securities writes on "The new new Libor? Unwrapping the Bank Yield Index." The "Short Duration Strategy brief explains, "On January 24, ICE Benchmark Administration (IBA)—the administrator for Libor—announced that it is working on its own potential alternative benchmark to Libor, known as the U.S. Dollar ICE Bank Yield Index (BYI). The new index is entirely transactions based, measuring the yields at which investors are willing to invest in unsecured short maturity bank debt issued by a subset of current USD Libor panelists willing to contribute data. Moreover, ICE has indicated that it would also incorporate other pricing data on secondary bank bond transactions from TRACE in order to increase transactions volumes. Under the proposed BYI methodology, a yield curve is fitted each day using these data, and then yields for the various BYI tenors are calculated using this curve. The result is a transaction-based Libor substitute that generally reflects wholesale unsecured bank funding costs." The update adds, "According to ICE, the BYI was designed to provide several important features of Libor, which SOFR currently doesn't offer, particularly for participants in lending and cash markets. ICE sought to create a rate that's representative of banks' arm's-length funding costs and generally moves in the same direction as the lender's own cost of funds. They also wanted a rate linked to the average cost of funds among a set of large banks, as opposed to a small group of lenders. Furthermore, the availability of forward-looking tenors provides certainty when setting rates at the outset of an accrual period, rather than relying on a trailing average of daily rate settings as with SOFR. More importantly, the BYI seeks to address some of the issues that have necessitated Libor's replacement in the first place, particularly with respect to the lack of primary transaction data on which banks can based their submissions. However, we find that there are potential issues with BYI."
