Bloomberg Professional Services

Bloomberg Short-Term
Bank Yield Index
Consultation on Methodology Enhancement

BISL

October 7, 2021

Proposed BSBY Methodology Enhancements

Background
BSBY is published by Bloomberg Index Services Limited (“BISL”) daily based on a methodology that uses athree-day rolling window of input data. Under the current methodology, the minimum thresholds are $60
billion for the Overnight, $10 billion for 1M, $10B for the 3M, $10B for the 6M and $9B for the 12M rate(“Minimum Thresholds”).
The transaction-related input data is aggregated and contributes to each tenor based on the respective daysto-maturity (“DTM”) corridor of the underlying instruments. For example, BSBY Overnight has a DTM corridor
of one to five days; BSBY 1M has a corridor of six to forty-five days.
In the event a Minimum Threshold is not met, the current BSBY construction algorithm relies on a lookback
process that expands the window by incremental days (with a maximum of five days) to meet the required
threshold per tenor. If none of the incremental lookbacks achieve the required input data volume, the previousbusiness day BSBY rate is carried over for such tenor (the “Carry Forward”).
Historically, BSBY calculations reflect a limited use of the existing lookback mechanism. For example, the BSBY
3M required a fourth day lookback in 2.5% of rate calculations over the past five years with no need to use afifth day. The Carry Forward has never been needed on any BSBY tenors over this period. Nevertheless,following discussions with clients and other stakeholders, BISL has determined to issue this consultation togather market feedback on whether to enhance the resiliency of the BSBY methodology during periods ofextreme market stress.
For clarity, these enhancements would only apply during—and for so long as—these extreme market scenarios
are in effect, if ever, and would not otherwise change the day-to-day calculation or existing historicalperformance of the BSBY rate.
As a reminder, BSBY is not currently available for use as a benchmark under the UK Benchmark
Regulation and must not be used as a benchmark in the United Kingdom.

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Executive Summary
BISL is soliciting stakeholder feedback on changes to the BSBY methodology’s calculation waterfall process, in lieu of theCarry Forward, in the event the relevant Minimum Thresholds are not met (the “Calculation Waterfall”). 1
The first step is to expand the DTM corridor for the affected tenor to include the adjacent input data (“Initial Expansion” or“IE”). For example, BSBY 3M would include input data from the BSBY 1M and the BSBY 6M.
If the Minimum Threshold remains unmet, then the rate would be calculated using a linear regression global fit of all input
data across the curve (“Global Fit” or “GF”).
In the event the Global Fit calculation fails to meet the requisite Minimum Threshold, the rate would be calculated byapplying a formulaic spread to the New York Fed’s Overnight Bank Funding Rate (“OBFR”). Figure 1 depicts this updated
Calculation Waterfall as compared to the current BSBY methodology.
Figure 1

Each of these steps is described in further detail below along with relevant information regarding input data volumes andhypothetical rate performance.

1 The current BSBY methodology is available under the ‘Resources’ tab here: https://www.bloomberg.com/professional/product/indices/bsby/2

Enhancement Step 1 – Initial Expansion
In the event the calculation window expansion to five days fails to meet the relevant Minimum Threshold for a particulartenor, rather than trigger the Carry Forward, such tenor’s calculation will include input data from adjacent tenors under theInitial Expansion enhancement. For example, if the BSBY 1M fails to meet its Minimum Threshold, input data from theOvernight and the 3M will be included. 2The table below defines the DTM range for each rate under the Initial Expansion scenario.
IE DTM Range
StartEndTicker

Evaluation Point(DTM in Calendar days)

BSBYON

Next business day

145

BSBY1M30

1125

BSBY3M

906240

BSBY6M180

46400

BSBY12M

365

126400Figure 2 below depicts this Initial Expansion from an input data perspective using the BSBY 3M as an example.
Figure 2

2 For the Overnight, just the 1M transaction volumes would be included.

3Enhancement Step 2 – Global Fit
In the event the Initial Expansion still fails to meet the Minimum Threshold due to extreme market illiquidity, then the input
data for all BSBY tenors will be included and the calculation algorithm will be calculated as a Global Fit.
Figure 3 below depicts this Global Fit from an input data perspective using the BSBY 3M as an example.
Figure 3

The BSBY index team has tested these enhancements to assess historic input data volumes available under each scenario.
Figure 4 below depicts average volumes for the BSBY 1M under the Initial Expansion and the Global Fit against the average
input data volumes for the standard BSBY 1M rate calculations as well as the average input data volumes using the full fiveday lookback. As can be seen, average input data volumes are well above relevant Minimum Thresholds.
Figure 44Figure 5 below depicts average input data volumes for the BSBY 3M under the Initial Expansion and the Global Fit against
the average input data volumes for the standard BSBY 3M rate calculations as well as the average input data volumes using
the full five-day lookback.
Figure 5

The BSBY index team has tested these enhancements to assess performance of the rate under each scenario, as well.
Figure 6 below depicts the performance of the BSBY 1M under the Initial Expansion and the Global Fit against both thestandard BSBY 1M performance as well as the performance using the full five-day lookback.
Figure 65

Figure 7 below depicts the performance of the BSBY 3M under the Initial Expansion and the Global Fit against both thestandard BSBY 3M performance as well as the performance using the full five-day lookback.
Figure 7As noted in our July, 2021 report, underlying input data volumes remained significant even during the March 2020 periodof market stress (March 18, 2020 to April 1, 2020). Accordingly, we also tested BSBY’s proposed Calculation Waterfallchanges by significantly downscaling the overall set of input data across the curve. For BSBY 1M, just the Initial Expansion
was necessary. For BSBY 3M, the Global Fit was needed under this hypothetical scenario analysis.
Figure 8 below depicts the performance of the BSBY 1M using the Initial Expansion against the standard BSBY 1M
performance.
Figure 86Figure 9 below depicts the performance of the BSBY 3M using the Global Fit against the standard BSBY 3M performance.
Figure 9Enhancement Step 3 – Publicly Available Bank Funding Rate Plus Spread Add-On
In addition to the Initial Expansion and Global Fit enhancements set forth above, the BSBY index team proposes a sixth andfinal step in the Calculation Waterfall in the event underlying markets for BSBY lock-up (“Level 6”).
Under this market crisis scenario, BSBY would produce a rate by calculating a per tenor spread adjustment (“Spread AddOn”) and adding this to the New York Fed’s Overnight Bank Funding Rate (“OBFR”). OBFR has been identified as anappropriate base rate because, like BSBY, it is market-driven, transaction-based, unsecured and reflects wholesale bankfunding. 3
The Spread Add-On is determined by averaging (i) the 5-year daily average spread of a BSBY tenor (tM) minus thecorresponding day's OBFR and (ii) the 5-day daily average spread minus the corresponding OBFR.
Spread = (5Y daily avg (BSBYtM - OBFR)) + (5D daily avg (BSBYtM - OBFR))
2This Spread Add-On would be calculated using the above formula which equally weights a long-term average credit/liquidity
spread with a short-term average credit/liquidity spread. In this way, both long term and short term spread volatility are
equally accounted for.

3 For more details on the OBFR, please see here: https://www.newyorkfed.org/markets/reference-rates/obfr

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Figure 10 depicts the hypothetical performance of an overnight publicly available base rate plus Spread Add-On against
LIBOR 3M. 4
Figure 10

Calculation Waterfall Application
For clarity, once BSBY requires calculation at Level 6 of its Calculation Waterfall, the Spread Add-On will remain fixed as
initially calculated for the next 30 calendar days should BSBY again require calculation via Level 6. Each calculation day,however, the BSBY rate calculation will begin at the first level (i.e., three-day window) before advancing, as and if needed,through each step in the Calculation Waterfall.
Process & Timing
The changes proposed herein are informed by extensive engagements with various stakeholders, including key industry
groups. In an effort to ensure all interested BSBY users are provided an opportunity to provide input, however, the formal
consultation period will be open until November 1, 2021.
If these changes are approved via BISL’s index governance process after the conclusion of the consultation period, the BSBY
index team will make a public announcement detailing the specifics of the change and its implementation date.
The methodology changes outlined above are intended to work in conjunction with the contractual fallbacks in both loan
and derivative markets’ standard documentation. The BSBY index team continues to collaborate with relevant industry
bodies to ensure a comprehensive approach to rate resiliency and robust fallbacks.
Any questions, comments or suggestions should be directed to info@bloombergindices.com.

4 OBFR began publication in 2016 and BSBY’s backfilled history goes back five years (to 2016). Therefore, to approximate “OBFR plus Spread Add-On” during

March of 2020 (which would require data back to 2015 for both rates), proxy data which highly correlates with such rates has been used. I.e., Effective Federal
Funds Rate (EFFR) for OBFR and LIBOR 3M for BSBY 3M.

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