Having your software on the desks of more than 300,000 finance professionals brings both opportunities and responsibilities. In the long-term decommissioning project Libor – the most popular benchmark of interest rates on the market – the commitment was the first.
Bloomberg customers, who have used the platform for various prices and other features, wanted to continue to do so as new risk-free rates (RFRs) were introduced when alternatives were signed, allowing firms to automatically rearrange instruments at new rates after Libor’s demise, and spreads were set between Libor and its replacement.
“The supply of these things was optional,” says Jose Ribas, head of Bloomberg’s global risk and pricing department in London. “We have big banks USA and Europe, who use us for structured notes and exotics, for example, and they needed to update the workflow of front-end office traders, to update the price verification process. Counterparty risk and market risk – all these models had to be updated simultaneously so that firms could continue to keep accounts, continue to do business.
Other clients and uses have varied, from insurance companies calculating margin claims to non-financial corporations using Bloomberg to account for hedging or asset / liability management.
This work was not subject to discussion, but required enormous effort on the part of the supplier. Ribas believes the transition project has accounted for one-fifth to one-third of his team worldwide over the past couple of years. He adds that the “dozens” of this team had almost no vacations or no vacations at the end of 2021, as they were on the phone to help customers with any problems, since the publication ended for the bulk of Libor’s fixes, and came into force replacement.
In that regard, Bloomberg was in the same boat as other fixed-income vendors and analysts. This year, the company won the technology provider category for demonstrating that it is not just another pricing and analytics firm – or, for that matter, just a market data provider or benchmark administrator. These are all three, and sometimes the firm’s additional businesses make up much more than the sum of these parts.
The opportunity that arose as a result of the Libor transition is one illustration of when clients struggled with one of the project’s most difficult challenges: the fact that RFRs – “overnight” rates, which do not have a component of bank credit risk, which was built into Libor. For many market participants, this was not a problem; they were pleased with the increase in overnight rates to create urgent versions RFRs. Others wanted not just a benchmark for the term, but one that would move according to the credit cycle.
Some of these recent firms have turned to Bloomberg for help, says Umesh Gajria, the firm’s global head of index products. He describes that Libor is so “deeply integrated into customer systems and products” that its removal and replacement was reminiscent of archeological excavations – old artifacts had to be carefully exhumed rather than uprooted.
“Going back to my example with archeological excavations, when we were excavating a certain area – the cash market – customers asked us, ‘Hey, can you come up with a solution for a rate that has built-in credit sensitivity?’ So it made us go back to the drawing board, and we realized that there are a lot of customers who are facing an important problem, ”says Gaia.
The extent of this problem has been the subject of heated debate during the transition. Regulators wanted liquidity to grow rapidly RFRs, and only reluctantly supported work that would create branches or individual landmarks. In some markets, the issue has barely raised its head; in others it caused a mini-riot.
It was believed that lenders were most reluctant to give up Libor’s credit sensitivity, warning that in times of financial stress the rates of bank financing and RFRs will detach and move in opposite directions. To compensate for this risk, lending banks use RFRFix an extra spread today.
However, Gajria insists that credit sensitivity is not just a benefit to creditors.
“I think a number of borrowers want a simple solution in terms of understanding the value of their loan. If you borrow against RFR In today’s benchmark, your total cost consists of a rate – the base rate – plus an additional spread that covers potential bank financing costs, and a credit spread that is based on the customer’s own risk profile. So now you have three components – something the market isn’t necessarily used to, ”he says.
An alternative to Bloomberg BSBY, short for Bloomberg Short-Term Bank Yield Index. This benchmark, which is approaching its first birthday, is based on wholesale financing transactions on the company’s electronic platforms, as well as on firm bank quotes. Regulators insist that any Libor replacement is based on real transactions – yes BSBYQuotation data is reduced and limited to avoid jamming of trade data.
If banks know that their financing cost is covered, they can give a better price. If they don’t know that they will pay for funding in three months, in 12 months, then obviously you will need to cover this with an extra spread
Umesh Gajria, Bloomberg
This is a simpler guideline for borrowers, says Garia – banks do not need to fix the spreads of funding, because the rate must increase or decrease according to the cost of funds. As a result, he argues, it should also be cheaper.
“If banks know that their financing cost is covered, then they can give a better price. If they don’t know that they will pay for the funding in three months, in 12 months, then obviously you will need to cover it with an extra spread. This spread may be needed in a crisis, but why would a borrower want to pay for it in advance and for the entire term of the loan? ” He asks.
BSBY for his short life has caused much controversy. A few months after its launch the chairman USA Securities and Exchange Commission (SVK), Gary Hensler, warned that the trading volumes that underlie the benchmark are a fraction of those SOFRofficial replacement for USA Libar dollar. Then, last September, Gensler resumed the attack, saying BSBY did not meet world reference standards. The Great BritainThe Office of Financial Control warned that contractual rate cancellations – a waterfall of measures that determine what will happen to a benchmark if major transaction volumes decrease – were not reliable enough to meet local benchmark rules.
In November, Bloomberg amended the alternatives. Gajri says it was not a response to criticism from regulators: “It was not a response to anything or anyone. One of the drivers was, in effect, to make backups more sustainable, but that has always been part of our plan. ”
Regulatory sides now seem to have diminished. Gairia says he hasn’t heard anything lately, and offers an initial confrontation BSBY perhaps it was more due to the desire of regulators to increase liquidity RFRS than any fundamental opposition to the emergence of credit-sensitive alternatives such as BSBY.
“I don’t think the multi-tariff environment is necessarily against it. У SOFR acceptance, we went down to the wire – it was not where it could be and should have been. But now we are in a good place as a market, the world has gone on SOFR “And I think it’s positive for the market,” he said.
BSBYThe original role was as a benchmark in bilateral commercial lending, where public data is scarce – Gajria says only that “some banks” use rates in these transactions – but it has also been used in some larger public transactions, including the September loan $ 2.3 billion from Knight-Swift Transportation. BSBY Gajria says swap volumes are also growing: about $ 20 billion has been tentatively sold this year, five times the 2021 volume.
The standard can add more strings to your bow. Gajri says that “about a dozen” different uses have emerged – for example, some asset managers have asked about the use BSBY to compare the income they receive from cash investments, instead of Libor. Insurers also asked about the use BSBY to discount their liabilities, he adds.
Apart from Libor, Bloomberg has also been known for a number of other pressing issues. The firm was considered for this award after winning three categories Risk.netseparate awards for technology vendors, including one for Libor support and another for liquidity risk software in the marketplace, LQA.
The latter was originally adopted because the funds sought to meet the requirements SVKNew rules for classifying the liquidity of their holdings, says Bradley Foster, head of corporate content at Bloomberg. Since then, use has shifted from mostly regulatory requirements to a broader set of risk measurement and management issues, a development that heralds the industry well, given the general consensus that markets will be sharper this year and liquidity may be lower.
“If you had asked me 18 months or two years ago how well-equipped the industry was, I could have gotten another answer, but I think today they are very aware of it. We have a long-standing regulatory push on this topic, as well as on these companies with very public liquidity problems, ”he says, a clear reference to the undermining of the Woodford Equity Fund and a number of Swiss bond funds. manager, GAM.
“Thus, many firms have moved away from subjective liquidity assessment to a data-based approach to liquidity risk assessment,” Foster adds.
This data-driven approach is included in other important regulatory initiatives, such as the Fundamental Review of the Trading Book, which links capital weakening directly to the depth of data underlying banking models and the extent to which simulation results are consistent with front offices. . and risk function. This context is pushing more and more customers towards Bloomberg, Foster argues, although the firm does not offer any figures to support this, citing company policies.
“People understand that getting, receiving and normalizing data, then creating compatibility between different data sets and finally, in addition to everything, applying analytics is very expensive. They also understand that even if you bear these costs, you are not sure that you have the best product in your class. We have created tremendous stability of regulatory products, we have done this many times before. We understand the painful moments, and we can bring the product to market pretty quickly, ”he says.