SOFR Academy

Last updated
SOFR Academy
TypePrivate
Industry Economic education, financial technology, financial market information
Founded2020
FounderMarcus Burnett
Headquarters
New York City
,
United States
OwnerMarcus Burnett [1]
Website sofr.org

SOFR Academy, Inc. is a U.S.-based economic education and market information provider. In connection with global reference rate reform and the transition away from the London Interbank Offered Rate (LIBOR), [2] [3] [4] the firm operationalized benchmark credit spreads US-dollar Across-the-curve credit spread indices (AXI) [5] that can be referenced in lending products in conjunction with the Secured Overnight Financing Rate (SOFR) [6] [7] [8] to mitigate mismatches for financial institutions between their assets and liabilities in times of market stress thereby promoting their ability to provide credit. [9]

Contents

SOFR Academy is a member of various industry and academic associations such as the American Economic Association (AEA), the Loan Syndications and Trading Association (LSTA), the International Swaps and Derivatives Association (ISDA), the Bankers Association for Finance and Trade (BAFT), which is a wholly owned subsidiary of the American Bankers Association (ABA), the United States Chamber of Commerce (USCC), [10] and the Bretton Woods Committee (BWC). [11]

Foundation

Founded in 2020, SOFR Academy was established by Marcus A. Burnett, [12] a former interest rate trader and capital markets consultant who began his career at the Commonwealth Bank of Australia (CBA). The firm initially focused on economic education in connection with reference rate reform, and in 2021, expanded their concentration in response to a request by ten U.S. regional banks for the development of a credit spread supplement for SOFR.

The firm's panel of advisors includes academics from Harvard University, University of California, Berkeley, New York University, Tsinghua University, University of Oxford, and the London Business School. Massachusetts Institute of Technology Professor Haoxiang Zhu is a former advisor of the firm and stepped down in November 2021 prior to being appointed as the Director of the U.S. Securities and Exchange Commission's (SEC) Division of Trading and Markets. Former Federal Reserve Board and United States Department of the Treasury economist, Samim Ghamami, [13] joined the firm as a Senior Advisor in 2021 and currently serves as an economist at the SEC's Division of Economic and Risk Analysis (DERA). In 2022, Alex Edmans was appointed to the firms panel of Advisors. [14] In 2023, former J.P. Morgan Head of US Interest Rate Strategy, Alex Roever, joined the firm as a Senior Advisor.

SOFR Academy is backed by leading Austin-based venture firm 8VC, [15] led by Palantir Technologies founder Joe Lonsdale, as well as people such as Robert Litterman, who spent 23 years at Goldman Sachs and developed the Black–Litterman model together with Fischer Black in 1990.

Operationalization of AXI and FXI

In 2021, SOFR Academy announced its intention to publish the Across-the-Curve Credit Spread Indices [16] to assist the market with U.S. Dollar LIBOR transition. [17] [18] [19] In 2022, Invesco Indexing LLC, an independent index provider owned by global asset manager Invesco Ltd (NYSE: IVZ), [9] partnered with SOFR Academy to launch the first-of-their-kind US-dollar Across-the-Curve Credit Spread Indices ("AXI") [20] [21] [22] [23] and US-dollar Financial Conditions Credit Spread Indices ("FXI"). [24] [25] [26] The US-dollar denominated AXI and FXI benchmark credit spreads are accessible via Bloomberg and Refinitiv / LSEG.

These indices work in conjunction with the SOFR and address a concern communicated by a group of American banks. [27] This concern was that under a SOFR-only environment in times of economic stress, the return on banks' SOFR-linked loans would decline, while banks' unhedged costs of funds would increase, thus creating a significant mismatch between bank assets (loans) and liabilities (borrowings). [28] [21] AXI and FXI were discussed at the Credit Sensitivity Group Workshops hosted by the Federal Reserve Bank of New York. [29] [7]

The construction design for AXI / FXI was first conceived jointly by Darrell Duffie [30] at the Stanford Graduate School of Business, and Antje Berndt [31] and Yichao Zhu at the Australian National University. [32] In 2014, Duffie chaired the Market Participants Group, charged by the Financial Stability Board with recommending reforms to Libor, Euribor, [33] and other interest rate benchmarks.

SOFR Academy has commissioned AXI / FXI feasibility studies for:

Further reading

Related Research Articles

In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations with forward rate agreements (FRAs), and with zero coupon swaps (ZCSs).

<span class="mw-page-title-main">Libor</span> Interest rate benchmark

The London Inter-Bank Offered Rate is an interest rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. It is the primary benchmark, along with the Euribor, for short-term interest rates around the world. Libor was phased out at the end of 2021, and market participants are being encouraged to transition to risk-free interest rates such as SOFR and SARON.

A reference rate is a rate that determines pay-offs in a financial contract and that is outside the control of the parties to the contract. It is often some form of LIBOR rate, but it can take many forms, such as a consumer price index, a house price index or an unemployment rate. Parties to the contract choose a reference rate that neither party has power to manipulate.

<span class="mw-page-title-main">Credit default swap</span> Financial swap agreement in case of default

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.

The International Swaps and Derivatives Association is a trade organization of participants in the market for over-the-counter derivatives.

In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount.

An interest rate future is a financial derivative with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative.

Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like SOFR or federal funds rate, plus a quoted spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD SOFR +0.20%.

A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, mergers & acquisitions, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of at least one year. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.

In finance, a currency swap is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. It has pricing associations with interest rate swaps (IRSs), foreign exchange (FX) rates, and FX swaps (FXSs).

James Darrell Duffie is a Canadian financial economist and is Dean Witter Distinguished Professor of Finance at Stanford Graduate School of Business.

A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardized credit security and may therefore be more liquid and trade at a smaller bid–offer spread. This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many single name CDS to achieve a similar effect. Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.

A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument.

An overnight indexed swap (OIS) is an interest rate swap (IRS) over some given term, e.g. 10Y, where the periodic fixed payments are tied to a given fixed rate while the periodic floating payments are tied to a floating rate calculated from a daily compounded overnight rate over the floating coupon period. Note that the OIS term is not overnight; it is the underlying reference rate that is an overnight rate. The exact compounding formula depends on the type of such overnight rate.

The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate. A sharp decline in transaction volume in this market was a major contributing factor to the collapse of several financial institutions during the financial crisis of 2007–2008.

SARON stands for Swiss Average Rate Overnight and is a measurement of the overnight interest rate of the secured funding market denominated in Swiss Franc (CHF). It is based on transactions and quotes posted in the Swiss repo market, and is administered by SIX.

ISDAFIX refers to a worldwide common reference rate value for fixed interest rate swap rates. ISDAFIX was restructured and renamed "ICE Swap Rate" in April 2015.

Secured Overnight Financing Rate (SOFR) is a secured overnight interest rate. SOFR is a reference rate established as an alternative to LIBOR. LIBOR had been published in a number of currencies and underpins financial contracts all over the world. Deeming it prone to manipulation, UK regulators decided to discontinue LIBOR in 2021.

Tokyo Overnight Average Rate or Japanese Yen Uncollateralized Overnight Call Rate is an unsecured interbank overnight interest rate and reference rate for Japanese yen. Mutan rate and TONA rate are the same things.

The St. Louis Fed Financial Stress Index (STLFSI) is an index measuring the degree of financial stress in markets published by the Federal Reserve Bank of St. Louis.

References

  1. ↑ "SOFR Standpoint Part II: A LIBOR transition discussion". Hunton Andrews Kurth LLP.
  2. ↑ "Leaping the LIBOR hurdles | Treasury Today". March 16, 2023.
  3. ↑ "As Libor ends, credit-sensitive rates face day of reckoning - Risk.net". www.risk.net. June 29, 2023.
  4. ↑ "The Libor replacement stakes: runners and riders - Risk.net". www.risk.net. June 14, 2021.
  5. ↑ Dew, Kurt (June 25, 2021). "SOFR Is A Dead End: It's AXI Or BSBY | Seeking Alpha". seekingalpha.com.
  6. ↑ "Regulators Draw a Line on an Attempted Use of Term SOFR". www.garp.org.
  7. 1 2 "NY Fed paper warns of systemic risks from SOFR credit lines - Risk.net". www.risk.net. February 8, 2023.
  8. ↑ "Progress on Global Transition to RFRs in Derivatives Markets" (PDF). March 2023. Retrieved December 5, 2023.
  9. 1 2 "Invesco / SOFR Academy USD Across-the-Curve Credit Spread Indexes (AXI)". www.invescosofracademyaxi.com.
  10. ↑ "SOFR Academy, Inc. – ISDA Membership". membership.isda.org.
  11. ↑ "How Large Regional Banks Can Succeed in a Higher Interest Rate Environment | The Bretton Woods Committee". www.brettonwoods.org.
  12. ↑ Maurer, Mark (January 13, 2023). "Companies, Lenders Clash Over Loan Spreads in Switch From Libor" – via www.wsj.com.
  13. ↑ "Samim Ghamami". samimghamami.com.
  14. ↑ "SOFR Academy Appoints Alex Edmans to Panel of Advisors". April 29, 2022.
  15. ↑ "8VC | A different kind of VC firm". www.8vc.com.
  16. ↑ "Credit Sensitivity & the Across-the-Curve Credit Spread AXI". prmia.org.
  17. ↑ Wiltermuth, Joy. "Goodbye Libor? House spending bill offers a patch for $16 trillion debt backlog mired by the rate". MarketWatch.
  18. ↑ "Many firms still not prepared for US dollar Libor transition". Euromoney. August 26, 2022.
  19. ↑ "SOFR Academy Announces Its Intention to Publish the Across-the-Curve Credit Spread Index (AXI), to Assist the Market With U.S. Dollar LIBOR Transition". www.businesswire.com. March 31, 2021.
  20. ↑ Ghamami, Samim (July 16, 2023). "Unintended Impact of LIBOR-SOFR Transition on Credit Markets and Economic Activity" (PDF). Retrieved December 5, 2023.
  21. 1 2 "Bank Funding Risk, Reference Rates, and Credit Supply - FEDERAL RESERVE BANK of NEW YORK". www.newyorkfed.org.
  22. ↑ "Why the Shift in Benchmark Rates Could Hurt Banks".
  23. ↑ Tuckman, Bruce (January 26, 2023). "Short-Term Rate Benchmarks: The Post-LIBOR Regime". doi:10.2139/ssrn.4351722 – via Social Science Research Network.
  24. ↑ Invesco Ltd; SOFR Academy. "Invesco Indexing and SOFR Academy announce official launch of the Invesco USD Across-the-Curve Credit Spread Indices (AXI)". www.prnewswire.com.{{cite web}}: CS1 maint: multiple names: authors list (link)
  25. ↑ "SOFR Academy, Invesco Launch New Credit Spread Indices". July 26, 2022.
  26. ↑ "Western Asset Blog: LIBOR Transition Update—When Does the New Term Begin?". www.westernasset.com.
  27. ↑ "Credit sensitivity letters" (PDF). Federal Reserve Bank of New York. 2020. Retrieved December 5, 2023.
  28. ↑ "Unintended Impact of LIBOR-SOFR Transition on Credit Markets and Economic Activity | The Bretton Woods Committee". www.brettonwoods.org.
  29. ↑ "Transition from LIBOR: Credit Sensitivity Group Workshops - FEDERAL RESERVE BANK of NEW YORK". www.newyorkfed.org.
  30. ↑ "Darrell Duffie, Graduate School of Business, Stanford University". www.darrellduffie.com.
  31. ↑ "Antje Berndt".
  32. ↑ "Dr Yichao Zhu | College of Business and Economics". cbe.anu.edu.au.
  33. 1 2 "Euro Axi rate proposed as Euribor fallback - Risk.net". www.risk.net. June 28, 2023.
  34. ↑ "SOFR Academy welcomes publication of "EURAXI: a benchmark for Euro credit spreads" paper by University of Oxford academics". www.businesswire.com. June 27, 2023.
  35. ↑ "EURAXI: A Benchmark for Euro Credit Spreads". INET Oxford.
  36. ↑ "Rama Cont | Mathematical Institute". www.maths.ox.ac.uk.
  37. ↑ "Susanna Saroyan". INET Oxford.
  38. ↑ Asia, Manesh Samtani, Regulation (September 11, 2023). "New Study Explores Feasibility of AXI, FXI Indices for Japan".{{cite web}}: CS1 maint: multiple names: authors list (link)
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