2018年-普华永道全球_US_perspectives_on_credit_spread_adjustments_PwC_7页_367kb

LIBOR Transition Series: Credit Spread Adjustments

Core Content

The document discusses the ISDA consultation on credit spread adjustments for the transition from Interbank Offered Rates (IBORs) to Alternative Risk-Free Rates (RFRs), with a focus on the US market. The consultation addresses the challenge of selecting an appropriate credit spread adjustment method to account for the bank credit risk premium in IBORs, which is absent in RFRs.

Main Viewpoints

1. Need for Credit Spread Adjustment

• The transition from IBORs to RFRs requires adjustments to account for the difference in credit risk between the two rates.
• ISDA has proposed three alternatives for credit spread adjustments.
• These methods aim to minimize value transfer when fallback provisions are triggered.
• The consultation does not address USD LIBOR and SOFR immediately due to limited historical data, with plans for a supplemental consultation.

2. Fallback Trigger and Credit Spread Calculation

• Credit spreads are calculated on the business day before the fallback trigger.
• The spread is applied only after the fallback takes effect.
• The fallback trigger may not be the same as the effective date of the fallback.

3. Credit Spread Adjustment Options

Option 1: Forward Approach

• Description: Uses forward spread curves between the relevant IBOR and RFR to determine the credit spread.
• Advantages:
  • Minimizes value transfer at the fallback trigger date.
  • Reflects future market expectations.
• Disadvantages:
  • Requires functioning markets and extensive data.
  • Vulnerable to manipulation.
  • Not compatible with SORf or CORf adjusted RFRs.

Option 2: Historical Mean/Median Approach

• Description: Uses the mean or median of historical credit spreads over a 5-10 year period.
• Advantages:
  • Less susceptible to market volatility and manipulation.
  • Reflects long-term market trends.
  • Based on readily available data.
• Disadvantages:
  • May not be present value neutral.
  • Requires long historical data.
  • May not reflect current market conditions due to limited SOFR history.

Option 3: Spot-Spread Approach

• Description: Uses the spot spread observed the day before the fallback trigger.
• Advantages:
  • Simple to implement and understand.
  • Requires only the most recent data.
• Disadvantages:
  • Vulnerable to volatility and manipulation.
  • Not compatible with ARRf adjusted RFRs.
  • Likely to result in value transfer.

Key Observations

• Forward Approach:

  • May lead to value transfer if market conditions change after the fallback is triggered.
  • Relies on a robust forward LIBOR curve, which may not be available as markets move away from LIBOR.

• Historical Mean/Median Approach:

  • Provides a smoother transition but may not reflect current market conditions.
  • May result in value transfer due to the assumption of a prolonged low-interest rate environment.

• Spot-Spread Approach:

  • Easy to calculate but lacks future expectations and is susceptible to volatility.
  • Likely to result in value transfer.

Next Steps

• ISDA has asked market participants to rank the nine compatible combinations of RFRs and spread adjustments.
• The deadline for comments was October 12, 2018.
• Companies are encouraged to actively participate in the consultation and consider migration strategies to avoid reliance on fallbacks.

Closing Considerations

• All proposed methods have limitations and are not perfect.
• Fallback solutions are necessary for exposures that cannot be migrated.
• Market participants should not adopt a "wait and see" approach and should engage all relevant departments to understand the implications of each method.

Additional Information

• Contact: PwC provides contact details for several professionals in the Financial Services Practice.
• Disclaimer: The document is for general guidance and does not constitute professional advice.
• Copyright: © 2018 PwC. All rights reserved.