Bloomberg Short-Term
Bank Yield Index
July 1, 2021

BISL

BSBY report: Additional analysis and key facts

Bloomberg Professional Services

A Bloomberg Professional Services Offering

Bloomberg Short-Term Bank Yield Index

Contents
3 Executive summary
3 Background4 Why BSBY?
5 Bank ALM and the need for credit-sensitive term rates
7 BSBY vs. LIBOR: Key differences
8 Fundamentals of money markets in the U.S.
9 How money market issuance and trading occur
10 Robust volumes in times of market stress
11 Mitigating the risk of manipulation
13 Potential impact of money market reform on CP/CD volumes
14 Economic outlook and ramifications for the money markets
15 Conclusion

2

Bloomberg Short-Term Bank Yield Index

Executive summary
Bloomberg is proud to support the efforts of the public
sector and market participants to facilitate the orderlytransition from the London Inter-bank Offered Rate (LIBOR)
and other inter-bank offered rates (IBORs) to risk-free rates(RFRs), including the provision of a robust and transparent
credit-sensitive rate (CSR).
The aim of this paper is to further inform public-sector
and industry-level discussion around how CSRs—including
BSBY—can facilitate benchmark transition.

3

In particular, this paper addresses the following
key points:• Market participants and the public sector havedeclared the need, and support, for CSRs,
primarily for the lending market• CSRs are accepted and used in many markets
around the world, alongside RFRs
• BSBY is fundamentally and structurally different
from LIBOR• Testing has demonstrated BSBY’s resistance topotential manipulation• Expected money market reforms will likely haveminimal impact on the robustness of BSBY

BackgroundAs the December 31, 2021, initial deadline for LIBOR cessation
approaches, market participants are actively heeding the callof regulators and industry groups to transition away from
LIBOR and other IBORs and replace them with alternative rates.
The primary alternative rates that will form the backbone of
the financial markets post-LIBOR are RFRs, such as the Secured
Overnight Financing Rate (SOFR, for USD-denominatedderivatives) and the Sterling Overnight Index Average (SONIA).
These RFRs are seen as preferable to LIBOR—and less prone topotential manipulation—because they are based on data fromobservable transactions.
Public sector and industry groups, along with benchmark
providers, including Bloomberg, have been working withmarket participants to facilitate the orderly transition from
IBORs to RFRs. However, it has become clear that when it
comes to use cases for reference rates, one size does not fit all.
This is due to RFRs being structurally different from IBORs.
As overnight rates, they exhibit different liquidity and volatility
characteristics that are not aligned with banks’ borrowing andfunding costs. Bloomberg Index Services Limited (BISL) is
the official provider of fallbacks for the International Swaps &Derivatives Association, Inc. (ISDA), calculating adjustments
to the RFRs under ISDA’s methodology, which is based on
feedback that ISDA received from several market consultations
regarding these inherent differences.
While RFRs may address the majority of legacy LIBOR use
cases, many lenders and borrowers see the need for credit
sensitive alternatives—CSRs—for various reasons, as discussed
below.

1.

See: https://www.newyorkfed.org/newsevents/events/markets/2020/0225-2020

From February 2020 to January 2021, the Federal Deposit
Insurance Corporation, the Federal Reserve Bank of New
York, the Board of Governors of the Federal Reserve System,
the Office of the Comptroller of the Currency, and the
U.S. Department of the Treasury, convened several Credit
Sensitivity Group workshops to explore the need for CSRs
and how they may factor into benchmark transition for loan
products. The Credit Sensitivity Group workshops wereseparate from, and supportive of, the work of the Alternative
Reference Rates Committee (ARRC). It was noted in a letter tothe regional bank participants that included the Commodity
Futures Trading Commission, and Securities and Exchange
Commission, that:1“… the official sector supports the continued
innovation in, and development of, suitablereference rates, including those that may havecredit sensitive elements.”
Further to this notice, the agencies agreed that a bank may
use any reference rate for its loans that the bank determines
is appropriate for its funding model and customer needs.
As Bloomberg has been at the forefront of supporting
benchmark transition, we have deep knowledge of the use
cases for CSRs, and have worked with market participants
to develop and produce a transparent and robust CSR basedon transaction-related data to address the needs of thelending market and accelerate the overall LIBOR transition.

Bloomberg Short-Term Bank Yield Index

4

Why BSBY?
Bloomberg developed BSBY in response to requests froma number of lending market participants. These firms wereseeking a series of credit sensitive reference rates whichmeasure the average yields at which investors are willing toinvest USD funds on a senior, unsecured basis in systemicallyimportant banks. BSBY was developed to complement SOFR
by providing the lending market with an index that can helpbanks with asset/liability management (ALM) to better ensure
availability of funds during times of market stress.
To underscore the importance of this complementary
relationship, a seminal report by the Bank of International
Settlements (BIS) 2 stated:“…the new RFR-based benchmarks clearly fulfill
the first two of the three desirable features of an
all-in-one benchmark rate. Where they seem tofall short is the third key feature, i.e. serving
as a benchmark for term funding and lendingby financial intermediaries. Term rates derived
from market prices for RFR-linked derivatives(e.g. OIS or futures) will readily yield a risk-freeterm structure that can be used for discounting
purposes and fulfil various needs in the market.
But banks will still lack a benchmark that
adequately reflects their marginal funding
costs as a substitute for LIBOR. This speaks to
the limitations of using O/N rates, instead ofthose based on term transactions, to create
term benchmarks....”

Since then, there have been several efforts to remedy thisgap including, for example, fixed spreads over term RFRs. Suchrates may likely benefit borrowers in the current environment
but still do not mitigate funding stress and the associated
ALM mismatch that bank lenders would face in a countercyclical rate environment, as discussed in more detail later inthis report.
BSBY is designed and produced in alignment with the
IOSCO Principles for Financial Benchmarks (IOSCO Principles).3
The rate is based on consolidated, anonymized transactionrelated data and firm executable quotes of commercial paper(CP), certificates of deposit (CD) and bank deposits from
Bloomberg’s electronic trading solutions, and the trades ofsenior unsecured bank corporate bonds as reported in theTrade Reporting and Compliance Engine (TRACE). BSBY will
also soon include data sourced from the Depository Trust &Clearing Corporation (DTCC).
BSBY aggregates the above input data over a three-day
rolling window, filters this data by a list of eligible systemically-relevant banks, and uses a specialized curve-fitting
methodology to calculate overnight, 1-month, 3-month,
6-month and 12-month yields. The mix of input data isbased on banks’ reliance on these products to meet wholesalefunding needs and allows them to determine their lending
rates based on their funding costs. By lending at rates tied tofunding costs, banks can ensure that they maintain a positive
net interest income and manage their asset/liability exposure
while borrowers enjoy the transparency of a market rate.

2.

Beyond Libor: A primer on new reference rates, March 2019, available here: https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf

3.

IOSCO Principles of Financial Benchmarks Final Report, available here: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf. BISL’s assurance report is available
here: https://www.bloomberg.com/bsby. Note: BSBY is not currently available for regulated use in the UK. BISL is in the process of bringing BSBY within the UK Benchmark
Regulation framework.

Bloomberg Short-Term Bank Yield Index

5

Bank ALM and the need for credit-sensitive term rates
In the post-LIBOR world, banks will face additional challenges
if they are restricted to an actuarial approach of determining
and applying a fixed credit-spread add-on to an SOFR term
rate based on long-term historical relationships. In this
scenario, they could face increased risk of an ALM mismatch
and would be unable to offer short term lending rates tocustomers that effectively capture their market price of credit
risk in a stressed market environment.

One unintended consequence of requiring lenders to takea fixed historical spread plus term SOFR approach could behigher fixed spreads that vary subjectively across lenders(additional add-ons to their historical spreads as a countercyclical buffer) and possibly also dampen lender willingness
to provide SOFR-linked loans. This would be particularly
harmful to smaller and midsize banks which do not typicallyhave the capacity to engage in complex hedging strategies.

For example, if liquidity in funding markets begins to dry up
and institutional corporate borrowers are challenged to meettheir short-term cash-balance needs, they will naturally
tap their credit lines and revolving credit facilities, which aretied to short-term money market rates. In a counter-cyclicalenvironment with the policy rate trending down sharply,
any credit line tied to the SOFR rate plus a fixed credit spreadis going to see a sharp decline in value from the lenders’perspective, as the SOFR rate is strongly correlated to theFederal Reserve policy rate while the fixed add-on spreadremains unchanged.

From a borrower’s point of view, a widely acceptable standard
market rate that represents the wholesale cost of short-term
funding enables more efficient management of their forwardlooking borrowing costs. Furthermore, the development of aliquid derivatives market linked to that rate allows borrowers
to transform a variable-rate loan to a fixed-term liability, enact
more optimized ALM strategies, and perform risk management
activities.

On the funding side, lenders need to fund the surge in tappedlines of credit at considerably wider spread levels, reflecting
the elevated levels of stress in credit markets. This could resultin a strong decoupling: lower asset-side and higher liabilityside rates in a stressed market environment leading to overall
weakness in the lending sector as net interest margins undergo
extreme compression. Revolving credit facilities and credit
lines are especially important during times of stress and thelack of a credit-sensitive rate would make lenders reluctant toprovide this key source of liquidity when institutional corporateclients need it the most. The following graph highlights an
example of decoupling of risk-free rates (SOFR) and CSRs
(LIBOR, BSBY) at the onset of the pandemic in March 2020.

The ability for lenders to make loans linked to CSRs would
remedy this shortcoming to the extent a widening credit
spread offsets the rapid reduction in the RFR component instressed market conditions, protecting against any adverse netinterest margin (NIM) compression. With borrowing andlending rates aligned, banks would be more willing to extend
credit in normal market conditions as well as during stressful
times.
BSBY is designed to be used in the lending markets on a
fit-for-purpose basis. The dynamic credit sensitivity built
into BSBY makes it suitable for both lenders and borrowers,
especially as a majority of the loans outstanding today are
already tied to credit-sensitive benchmarks (such as LIBOR).

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4

Figure 1: Comparisonof risk-free and creditsensitive rates.

0.2
0Source: Bloomberg Finance L.P.
SOFR

LIBOR3M

BSBY3M

CME 3M Term SOFR

Estimates as of June 2021.

Bloomberg Short-Term Bank Yield Index

6

In addition, having a choice of rates suitable for clients andbanks based on their funding model will help accelerate
the transition away from LIBOR, given the broad market
acceptance of CSRs. A major positive development during
the LIBOR transition process was the broad understanding
and acceptance of fallbacks in various instruments linked tothe choice of benchmarks. Recent activity has shown thatclients have chosen SOFR as a fallback rate to BSBY as per
the guidance from the official sector. This should give further
comfort to the market and regulators that a LIBOR-like situation
will not be easily replicated with the availability and adoptionof multiple benchmarks and a fallback framework that is now
being incorporated by the market.
The need for a CSR complement to RFRs is not limited to the
U.S. loan market. Lending markets around the globe haveadopted a multi-benchmark approach.
The European markets have opted to reform EURIBOR (thesecond most widely-used benchmark after LIBOR), retaining
the rate rather than eliminating it entirely. Reformed EURIBOR
now co-exists with €STR, the EUR RFR rate administered by theEuropean Central Bank (ECB). Figure 2 highlights the estimatedsize of the lending market in Europe, which is comparable inmagnitude to the U.S.

This suggests that while the banking sector may want to be lessreliant on unsecured wholesale funding post the 2008 financial
crisis, it is still a material source for their total funding needs,
maintaining the need for credit-sensitive term benchmarks forthese markets. Indeed, the BIS predicted a market environment
where “…. different benchmarks could emerge that are better
fit for individual purposes than the ‘Swiss army knife approach’
implicit in a single benchmark.” 4And, to be clear, the secured/unsecured nature of a rate
does not make it more or less eligible or appropriate as abenchmark rate in the lending markets. Of the five major RFR
rates, only SOFR and SARON represent secured borrowing
while reformed SONIA, €STR and TONA are all unsecured
rates.5 What matters is the construction of the credit-sensitive
benchmark, the robustness and dynamics of the underlying
markets, and its resistance to manipulation, topics to which
this report now turns, beginning with key differences between
BSBY and LIBOR.

Nor is this dual-rate approach—a reformed CSR benchmark
complementing a local currency RFR—limited to the two largest
developed markets. A multi-benchmark approach has been
adopted in other markets, such as TIBOR (CSR) alongside
TONA (RFR) in Japan; CDOR (CSR) alongside CORRA (RFR) in
Canada; and reformed BBSW (CSR) alongside O/N RBA cashrate (RFR) in Australia.

USD
Reference index
Underlying volume
Expected linked market
Loan market volume

EUR

LIBOR

SOFR

EURIBOR

€STR

GBP

USD

SONIA

BSBY

N/A

>800

5

44

45

>200*

220,000

220,000

109,000

22,00030,00030,000

6,100

6,100

3,599

3,599

348

6,100

Figure 2: Underlying transaction volumes of interest ratebenchmarks and amounts outstanding in billions (local
currency) in instruments linked to such benchmarks.

*$165 billion in transactions supplemented
with $35+ billion firm offers (executable
quotes) over rolling three-day window.

Source: Bloomberg Finance L.P. Estimates as of June 2021.

4.

Beyond Libor: A primer on new reference rates, March 2019, available here: https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf

5.

Financial Stability Board (2019): “Overnight Risk-Free Rates, A User’s Guide” June 4 2019, table 1, available here: https://www.fsb.org/wp-content/uploads/P040619-1.pdf

Bloomberg Short-Term Bank Yield Index

7

BSBY vs. LIBOR: Key differences
Currently, USD LIBOR is the reference rate for approximately$220 trillion of instruments, while the commercial loan markets
represent 2.5% of that total, or about $6.2 trillion. Commercial
loans are the primary market segment that BSBY has beencreated to serve.
Figure 3 below depicts estimates of the target addressable
market for BSBY, focused on commercial loans and associatedderivatives resulting from risk management and hedgingrelated activities. Some floating-rate instruments andsecuritizations are also expected.
With this narrower set of use cases, BSBY is explicitly
constructed to differ from LIBOR:• BSBY is designed to not rely on subjective inputs or“expert judgment.” With our three-day rolling window
averaging more than $200 billion of data, BSBY relies
on transaction-related data in the same instruments thatbanks use to fund themselves.6• BSBY does not rely on submissions from individual
banks. While LIBOR was based and dependent on input
data contributed by a panel of contributor banks, BSBY
transaction-related data is sourced from Bloomberg’s
electronic trading solutions and SRO data sets including
FINRA and, pending final integration, DTCC. The data
is filtered and anonymized. Participants are not awareof the specific mix of the pre-defined and transparent
sources in any particular calculation, which, based onrate calculation algorithms, may change from one day to
the next.
• BSBY incorporates data from a larger portion of thefunding market than LIBOR. While the USD LIBOR

calculation is currently based on input data andsubjective judgment from a panel of 16 contributor
banks, BSBY incorporates data from instruments
issued by global systemically important banks (G-SIBs)
published by the Financial Stability Board, plus certain
other systemically relevant banks, and excluding stateowned banks. This results in a dataset that incorporates
transaction-related data from (currently) 34 banks—more
than twice the number of the LIBOR panel.
• BSBY is only available in USD. LIBOR is currently publishedin seven tenors across five currencies, with each setting
underpinned by varying levels of transaction data.
BSBY focuses on the USD market, which is characterized
by robust underlying transaction volumes. When BSBY’s
underlying transaction volumes are examined incomparison to its target addressable and linked markets,
it is well within the range of proportions of these key
rates. See Figure 2 above, which reflects the underlying
transaction volumes of various key interest ratebenchmarks and estimated amounts outstanding
in instruments linked to such benchmarks.
• BSBY is based primarily on transaction-related dataarising from issuers in the money markets seeking to fundthemselves at the lowest rate and investors looking forthe highest rate of return, as outlined in the next sectionsof this report. LIBOR, on the other hand, has shown
susceptibility to the subjective judgment of banks who
could have aligned interests.
• BSBY has been independently reviewed for its adherencewith the IOSCO Principles.

LIBOR is a reference
rate for approximately$220tn
SOFR
BSBY$6.2tn$1.3tn$1.6tn$1.6tnFloating-rate notes

Securitizations

Consumer loans

Commercial& business lending*$209tn*Includes commercial and business
lending products, such as revolvers,
C&I loans, and letters of credit

6.

Derivatives

Figure 3: Target BSBY
exposure currently using
LIBOR as a reference rate.
Source: Bloomberg Finance L.P. Estimates as of June 2021.

In contrast to the waterfall methodology of LIBOR, BISL may only use expert judgment or discretion in its administration of BSBY under limited circumstances (e.g., whether tocarry forward a prior day’s rate and/or during a market emergency). BSBY’s methodology is available at: https://www.bloomberg.com/bsby

Bloomberg Short-Term Bank Yield Index

8

Fundamentals of money markets in the U.S.
CP, CD and bank deposits are used by corporations andfinancial institutions to manage their short-term funding,cash flow and liquidity needs. These same instruments arefundamental to money market funds (MMFs), securities
lending firms, local government liquidity funds andinvestment managers employing short-term investment
strategies. The structure of financial market regulation in the
U.S. consolidates and facilitates the short-term nature andhigh turnover of the market. CP programs regularly authorize
multiple dealers to sell an issuer’s paper and these programs
are used like revolving lines of credit for issuers.

CDs are only issued by banks and are typically purchasedby both retail and institutional investors. The institutional
CD market has averaged $11.3 billion in daily issuance overthe last few years. Institutional CDs can have maturities that
extend for several years, but the bulk of maturities are within
one year.

Today, the size of the USD CP market is approximately$1.2 trillion—20% greater than in 2020. This is the highest level
seen over the last six years, according to data made available
by the Board of Governors of the Federal Reserve System,on the Federal Reserve Bank of St. Louis Economic Database(FRED).7 Daily issuance has averaged $82 billion from January
2018 through February 2021, and financial institutions’contribution to issuance and outstanding has grown to
59% of the total CP market in 2021, from 50% in 2019.

Outstanding commercial paper in trillions
1.2

1.1

1

0.9

0.8

Figure 4: Outstanding
monthly volume of CP
over the past six years.
Source: Federal Reserve Bank of St. Louis

7.

See: https://fred.stlouisfed.org/series/COMPOUT

Bloomberg Short-Term Bank Yield Index

9

How money market issuance and trading occur
There are approximately 2,500 banks, financial institutions
and corporations that participate in the CP/CD market.
Typically, an issuing institution will use the services ofmultiple dealers to facilitate the placement of their paperwith institutional investors. This is referred to as “dealer
placed” paper and is estimated to be 90% of the market.
The alternative method is “direct issued” paper, which is
conducted by a few large institutions that maintain theirown in-house funding desks.
Primary issuers in CP, CD and bank deposits seek to raisecash at the lowest cost, while the investors who buy this paper
want to maximize the returns on their short-term investments.
These competing interests between issuer and investor create
a competitive and efficient market. The dealers who place thepaper on behalf of the issuers work for a fixed spread and often
compete to place the paper, since it is common for multiple
dealers to work on the same programs, offering the same
issuer’s paper at the same rate for the same maturity period.
The economics of this model (issuer-to-investor), where
the issuer and investor have competing objectives and theultimate transaction resolves this conflict, differs starkly
from the dealer-to-dealer LIBOR model, in which subjective
judgement plays a key role and both sides to the fundingtransaction might not have competing economic objectives.

institutional money managers, securities lending firms, local
government investment funds, MMFs, short term bond funds
and other banks. There are hundreds of such institutional
investors acting as daily participants in this market.
The market for these funds is competitive and efficient withprocesses in place to automate credit review, relative value
analysis, and trade execution processes. The transparency,
price-discovery, analytics, and execution technologies available
to the investment community on various platforms are highlysophisticated and have created a competitive rate-setting andtrading process. Some large fund complexes have developed
algorithms that identify opportunities that are as little as 0.5
bps from the market rate for a given issuer or credit provider.
This level of efficiency facilitates a competitive market where
any anomaly or mispricing is quickly identified and acted
upon. Much of this market is fully electronic and “firm” clickto-trade offers are commonplace. For example, Bloomberg’s
electronic trading solutions had more than 450 unique-user
investment firms over the past six months.

Issuers’ funding needs are determined daily by their treasury
departments, which calculate the amount and term of theirfunding needed for that day. Working with their brokerdealer or their in-house funding desk, these institutions post
their issuance needs to various platforms that are used by
the investment community to facilitate their investment andcash management process.
The investment community for these products include

Dealer 1(Same offer rate)
IssuerInvestor
Dealer 2(Same offer rate)

Figure 5: Issuanceand trading in money
markets.

Bloomberg Short-Term Bank Yield Index

10

Robust volumes in times of market stress
One of the frequent concerns with the CP/CD and bankdeposit markets is how robust the volume of issuance isduring times of extreme market stress (e.g., Black Swan
events). A review of the short-term funding market for CP
during March 2020 shows a robust primary issuance market
that performed well for both issuers and investors, andtheir access to the liquidity needed. Data from Bloomberg’s
electronic trading solutions for commercial paper show thateven at the height of COVID market stress, there was a daily
average of $68 billion CP transactions.
Figure 6 highlights the monthly average during this period.
After the Federal Reserve announced the Commercial Paper
Funding Facility (CPFF)—which bolstered issuer, investor anddealer confidence—significant increases in volumes occurred.
This illustrates a scenario in which investors and issuers wereable to access liquidity in the primary short-term funding
market, during times when other markets experienced
extreme stress and liquidity challenges.

In addition, while BSBY’s underlying markets have been
robust, including during recent periods of stress, BSBY’sdesign, volume thresholds, and inputs, will be periodicallyreviewed by BISL’s governance and oversight bodies toensure BSBY remains a reliable measure of its intended
market interest (i.e., the average yields at which investors arewilling to invest USD funds on a senior, unsecured basis insystemically important banks). Should underlying marketschange, and material changes to BSBY’s design or inputs beneeded, BISL has a well-established history of working closelywith stakeholders to maintain the relevancy of its benchmarks.
As noted previously, we have already demonstrated ourcommitment to BSBY by acquiring additional data from DTCC
to further enhance our offering and protect against potentialchanges to market trading practices.

90,00080,00070,00060,00050,00040,00030,000Source: Bloomberg Finance L.P.

Figure 6: Rolling monthly
average volume in million dollarsof settled CP transactions.

Bloomberg Short-Term Bank Yield Index

11

Mitigating the risk of manipulation
BSBY has been constructed to be highly resistant to outlier
data points that may be expected under manipulation
scenarios, and BISL conducted multiple tests to demonstratethat the construction algorithm is successfully designed to
be robust against data concentrations and potential gamingof the index.
The BSBY methodology has several built-in protections
against manipulation:• The weight of each transaction is capped at $500
million to help ensure stability and reduce the risk of therate being unduly influenced by any single data point• BISL has imposed a single issuer (bank) cap of 20% toensure any given BSBY tenor is an average rate acrossan appropriately broad sample of banks• All yields above the 75th volume percentile and below
the 25th volume percentile are eliminated from thefinal calculation

As an initial test, we investigated the sensitivity of BSBY tomoves in yields in any of its constituents’ data on a given
date. In our test for May 26, 2021, for example, we shifted
the yields of the top 200 largest volume transactions,individually, by 5 bps upwards, and reviewed the impactof each scenario on the rate. The largest impact wasmeasured at 0.05 bps on that day (the BSBY3M rate
published at 10.637 bps).
Most notably, of the 200 scenarios of +5 bps shift, only
40% resulted in the final rate moving higher. (See Figure
7 below.) The other 60% of scenarios resulted in the ratemoving in the opposite direction—or had no impact on
BSBY. This unpredictability of how a potential manipulation
attempt might affect the actual rate is due to the outlier
elimination logic, capping, and the volume-weighted
regression used by the algorithm to generate the final
interest rate.

0.25

0.2

0.15

0.1

0.05

0

-0.05

50

60
Benchmark moves higher

Source: Bloomberg Finance L.P.

70

80
Benchmark moves lower

90

100

110

120

130

No Impact

Figure 7: Sensitivity of
BSBY3M to 5 bps up-movein constituents’ yields.

Bloomberg Short-Term Bank Yield Index

12

We then investigated the potential impact of bad actors
willing to offer egregious quotes or—in the case of direct
issuers—executing trades outside the context of the market
in an effort to move the BSBY3M index to their advantage.
In this scenario, the hypothetical dealer enters $8 billion
volume of executable offers (or $1 billion in executed tradesin direct issue dealer-to-dealer trades) 8 broken down into
fairly similar <$500 million blocks (to avoid the transaction
size cap our methodology imposes). BSBY3M requires
a minimum of $10 billion volume and has averaged $28
billion in total volume (executed trades plus executable
offers) over the past three years. The assumed $8 billionof executable offers in this scenario (or $1 billion trades)
hovered around the maximum volume allowed for a given
issuer (20% bank cap) before the algorithm started trimming
the entered positions.
This exercise was repeated daily over a full year (May 29,
2020, to May 28, 2021) with quotes that were 5 bps, 10 bps,
20 bps and 50 bps respectively higher than the BSBY3M
for that day. Figure 8 below highlights the overall effect ofthese four scenarios on the final rate, which did not exceed
a tenth of a basis point at the 95th percentile. The impact
decreases with the size of the shift and flattens after the +10
bps scenario.
For these 5-to-50 bps-shift scenarios, the analysis showsthat the impact of a bad actor willing to misquote CP and CD
instruments is, at worst, on one of the top 1% of impactfuldays, a 0.2 bps move. Under more typical circumstances, a
bad actor under these scenarios might reasonably expect a
0.01-0.03 bps move. In each case, however, it would not becertain as to the direction of the impact.9

To break even, the bad actor would need to be highly
leveraged on BSBY-based derivatives. They would alsoneed to target the rate on low-volume days and aroundsettlement/reset days of the rate, all while avoiding
detection and correctly predicting the direction of the move.
Their out-of-market quotes would also be subject to the
dynamics of the market, i.e., firm offers at too high a rate may
be automatically executed against; offers too low would notserve the funding needs of the bank issuer. And getting thedirection of the impact incorrectly would invert the potential
gain into an equal and opposite loss.
The unpredictability of the direction of the impact ofhypothetical manipulation attempts on BSBY, as illustrated
by Figure 7, and the small size of the potential P&L benefit
from doing so (see Figure 8) should make potential rate
manipulation attempts difficult, and provide deterrence
against any attempts.10 Put another way, the inherent riskof manipulation of BSBY is much lower than that of LIBOR.
It should also be noted that, in addition to robust daily
QA controls, BISL has a dedicated team which examines
trend and outlier analysis and has obligations to reportsuspicious activity that is identified. This team reports to
BISL’s governance and oversight bodies, including withrecommendations for enhancements to controls andupdates to benchmark design.

Shift 5 bps

Shift 10 bps

Shift 20 bps

Shift 50 bps

Average impact in bps

0.03

0.02

0.02

0.02

Median impact in bps

0.01

0.01

0.01

0.01

Worst day in bps

0.47

0.19

0.19

0.19

95th percentile

0.10

0.07

0.07

0.07

Figure 8: Impact in bps
of misquoting $8 billion in
executable quotes (equivalent
to $1 billion in trades) by 5, 10,
20 and 50 bps.

Source: Bloomberg Finance L.P.

8.

Executable quote volume is scaled by 12.5%, as indicated in the BSBY methodology document available here:
https://www.bloomberg.com/professional/product/indices/bsby/

9.

Based on the analysis, a move up to 0.47 bps was theoretically possible if the bad actor could accurately predict the single worst day. Again, the direction would not be certain.

10.

This not intended to be an exhaustive list of potential manipulation scenarios. Part of our trend analysis is aimed at identifying other possible scenarios and designing both
detective and post-calculation controls accordingly. For example, additional scrutiny and post-calculation analysis may be warranted around rate reset and settlement dates
or during periods of lower volumes.

Bloomberg Short-Term Bank Yield Index

13

Potential impact of money market reform on CP/CD volumes
U.S. regulators are contemplating money market reform, andsome believe that such reform would have a large impact onprime and tax-exempt MMFs. The contemplated regulation
has caused observers to speculate that the robustness of the
CP and CD market will decline, resulting in diminished data
volume for BSBY’s daily calculation.
Prime funds are significant buyers of CP and CDs and theconcern is that further regulation may cause the conversion
of prime funds to government MMFs, thereby reducing thedemand for CP/CDs. In 2016, an earlier round of MMF reforms
resulted in an 84% reduction in institutional demand for prime
funds and a 43% reduction in retail demand for such funds.
Concerns, however, with regard to potential reform efforts
should be put into context. As the Federal Reserve’s Flow ofFunds data shows, prime funds, as of May 2021, only hold 19%
of CP outstanding. See Figure 9 below. Therefore, the overall
demand for CPs and CDs is not unduly tied to the prevalenceof prime funds in the market.
MMF held 18% of CP
outstanding as of Q4 2020

It should also be noted that over 60% of prime fundinvestors are institutional investors who are seeking higher
returns than government funds offer. Figure 4 above shows
extended periods of upward-trending CP issuance; muchof this has been driven by the non-U.S. banking sector,
which has traditionally relied on CP issuance to access
USD funding.
Should demand recede due to a reduction in the numberof prime funds, it would likely not result in a diminishedappetite for CP/CDs, but rather a transition in the investor
vehicles accessing the paper. CP yields are likely to drift
higher in the face of steady supply, attracting new buyers
in the current historically record low-yield environment,
creating new sources of demand for CP. Furthermore,
institutional investors will likely find new vehicles like shortduration separately managed account (SMA) structures inwhich to invest.

Prime money market fund assets: Institutional vs. retail
ICI data: Wednesday levels in billions of dollars
1400

INSTITUTIONALRETAIL

50%

1200
1000

40%

800

30%

600
20%
400
10%

200
0

0%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Jan
16

Jan
17

Jan
18

Jan
19

Jan
20

Figure 9: MMF holdings of commercial paper outstanding(% of total).

Figure 10: Prime MMF assets: Institutional vs. retail.

Source: Federal Reserve Flow of Funds

Source: Investment Company InstituteJan
21

Bloomberg Short-Term Bank Yield Index

14

Economic outlook and ramifications for the money markets
As the U.S. economy recovers from the pandemic, mostmetrics for inflation have been skewed towards the upside
and the market is beginning to price Federal Reservetightening by the end of 2022 / beginning of 2023.
Additionally, the risk remains that in a scenario where the U.S.
recovery is deemed sufficiently strong, the bond markets
could reprice for the Fed to shrink its balance sheet first byending quantitative easing and resuming sales (“taper”) of
its Treasury and mortgage portfolio before commencing
a tightening cycle. This sequence of policy actions should
initially result in a higher and steeper yield curve similar to
the “Taper Tantrum” of 2013, when the Fed announced its
intention to commence tapering at its May FOMC meeting.

In either of these scenarios, asset managers will have a strong
demand for money market assets such as CP, CD and shortmaturity floaters, as they sharply decrease their exposure
to rising interest rates. On the supply side, bank issuers arelikely to have a need to fund strong growth in their loan books
as market expectations for strong economic growth andprospects for higher policy rates in the future will most likely
be a trigger for the Fed to embark on an asset-sale program.

Figure 11: Federal Open Market
Committee (FOMC) members’
projections as of June 23, 2021.

Figure 12: 2013 “Taper Tantrum” sawhigher yields and a steeper curve,
U.S. Treasury curve changes from May
22, 2013, to January 2, 2014.

Bloomberg Short-Term Bank Yield Index

15

Conclusion
While risk-free rates will be the primary alternative rates for
LIBOR and other IBORs, many market participants, industry
groups and regulatory bodies recognize there remains aneed for credit-sensitive term rates to complement RFRs
and meet the needs of the lending markets. Past and current
use of CSRs alongside RFRs in multi-benchmark regimes has
proven to be successful in many markets around the world.

BSBY, purpose-built for use in the U.S. lending markets,
is fundamentally different from LIBOR and has been tested
to demonstrate robustness during recent periods of market
stress, as well as resistance to potential manipulation.
Further, expected money market reforms will likely haveminimal impact on the robustness of BSBY, making it aresilient benchmark for issuers and investors in multiple
economic scenarios.

Disclaimer
The data included in these materials are for illustrative purposes only. None of Bloomberg Index Services Limited (“BISL”), Bloomberg Finance L.P. (“BFLP”) or any of theiraffiliates guarantees or makes any claim, prediction, warranty or representation whatsoever, express or implied, regarding the timeliness, accuracy, completeness of, or fitness
for a particular purpose with respect to, BSBY and each shall have no liability in connection therewith. None of BISL, BFLP, or any of their affiliates makes any representations
regarding whether the Index would be appropriate for any financial instruments. Market participants are encouraged to consider and analyze BSBY and determine
independently whether it would be appropriate for any such use.
BSBY is not sponsored, endorsed, sold or promoted by DTCC Solutions LLC or any of its affiliates (collectively, “DTCC”). DTCC makes no representation or warranty, express
or implied, to any member of the public with respect to BSBY or any financial product based on BSBY. DTCC shall not responsible for any errors or omissions in, or delays orinterruptions to the delivery of, BSBY, regardless of the cause. In no event, shall DTCC be liable for any direct, indirect, special or consequential damages, costs, expenses, legal
fees, or losses (including lost income or lost profit, trading loses and opportunity costs) in connection with BSBY or any financial product based on BSBY.
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