At the August 12, 2020, third meeting1 of the Credit Sensitivity Group,2 market participants (including representatives of 18 banks3) and banking regulators discussed (1) the types of funding costs that a potential spread adjustment would measure, (2) the important attributes of a potential credit spread adjustment and (3) conceptual design considerations for a potential credit-sensitive adjustment for SOFR.
Meeting attendees reviewed (1) practical considerations for designing robust reference rates and possible data sources that could be relevant to a potential credit-sensitive spread and (2) certain design considerations relevant to current and potential rates. Participants noted the inherent tension that exists between the objectives of representativeness and robustness—in particular, that increasing the amount of eligible transactions not only might improve the robustness of the spread but also might lead it to be less representative of the funding costs for a specific market segment.
Presentations included one by Professor Berndt4 that examined the potential use of Trade Reporting and Compliance Engine (TRACE) data, which had been suggested in a related recent paper regarding the “Across-the-Curve” credit spread indices. In another presentation, Comerica5 examined the possible use of money-market fund data.
A fourth (and presumably final) meeting of the Credit Sensitivity Group was held on August 27, 2020, but only the agenda6 therefor (stated to include borrower feedback) has been posted. It appears that, following this session with the borrowers, observations from the prior Credit Sensitivity Group meetings with banks and borrowers would be summarized for the official sector.
1 The meeting’s minutes and presentations are available at: https://www.newyorkfed.org/medialibrary/media/newsevents/events/markets/2020/csg-workshop-minutes-presentations-08122020.pdf.
2 We covered the earlier meetings of the group in our prior Perspectives “Comparable” Alternative Reference Rates to LIBOR: The Low Bar for Official Designation, the Much Higher Hurdle of “Fit for Use” and Implementation for Market Participants and That Already High Hurdle Looks a Little Higher as the US Credit Sensitivity Group Continues to Make Its Case for a More Credit-Sensitive Alternative to SOFR.
3 Including Bank of America, BBVA, Capital One, Citizens Financial, Comerica, Fifth Third Bank, First Republic Bank, Frost Bank, Huntington Bank, KeyBank, M&T Bank, MUFG, PNC, Regions, Signature Bank, South State Bank, US Bank and Wells Fargo.