BAFT's Letter to ARRC on Spread Adjustment Methodologies for Libor Transition

ARRC Secretariat
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
Via email: [email protected]

ARRC Secretariat:

BAFT (The Bankers Association for Finance and Trade) appreciates the opportunity to comment on the ARRC Consultation on Spread Adjustment Methodologies for Fallbacks in Cash Products Referencing USD LIBOR.

BAFT is an international financial services industry association whose membership includes a broad range of financial institutions throughout the global community. As a worldwide forum for analysis, discussion, and advocacy in international financial services, BAFT’s nearly 300 members provide leadership to build consensus in preserving the safe and efficient conduct of the financial system worldwide. BAFT closely monitors the impact that new policy initiatives could have on the provision of trade financing and payment services that support the real economy. To that end, BAFT’s comments are primarily focused on issues for these particular sectors of the banking industry.

Global trade relies upon accessible financing for trade transactions. Trade financing assists customers with their import and export requirements, by providing import/export financing and trade risk mitigation. Trade finance exposures1 are diverse in nature, smaller in value, shorter in tenor, self-liquidating and exhibit different behavior and payment patterns from other corporate banking products.

Since 2000, global trade flows have swelled from USD 6.2 trillion to a new peak of USD 18.5 trillion in 2018.2 Bank-intermediated transactions now represent more than a third of world trade. LIBOR, in the various currencies, has long been the default benchmark interest rate for trade finance. Trade finance references LIBOR because it has historically used forward looking term rates that manufacturers/traders/importers and exporters utilize to price their product margins against. In discussions with BAFT members across different geographies, it became clear that the transition from LIBOR to SOFR would have a deep impact across a variety of products.

Download the comment letter to read the full text.