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BNY Mellon inks SOFR trade finance deal as industry accelerates Libor transition

BNY Mellon has completed its first trade finance deal using CME Group’s secured overnight financing rate (SOFR), as global banks ramp up preparations for the phasing out of Libor-based transactions. 

The New York-headquartered lender announced last week it had issued a trade finance loan with Brazil’s Banco Bradesco using the SOFR reference rate, which was recommended as the successor to Libor by the US Alternative Reference Rates Committee (ARRC) in late July. 

After the end of 2021, new contracts for US dollar transactions will no longer be permitted to use the Libor reference rate, though it will continue for another six months for pre-existing agreements. 

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For transactions in euro, British pounds, Swiss francs and Japanese yen, Libor reference rates will no longer be usable after December 31 this year. 

Jason Granet, chief investment officer at BNY Mellon, says the bank has been “ahead of the curve on the Libor transition at the enterprise level”, and urges clients not to delay their own preparations. 

“I believe we will have many more success stories to share in the weeks ahead as, ultimately, Libor will not be used after December 31, 2021, and pushing the transition off is not an ideal approach for clients,” he says. 

Joon Kim, the lender’s head of trade finance and portfolio management, adds that BNY Mellon is “strongly encouraging clients to embrace alternative reference rates in a timely manner”. 

Its treasury services team has long been informing clients that all transactions would be moved to CME term SOFR, SOFR averages and overnight SOFR from October 1 this year, Kim says. 

Sheico Pimenta, executive general manager at Banco Bradesco, says the São Paulo-headquartered lender is “proud to be one of the first institutions to use SOFR as the benchmark rate in a trade financing transaction”. 

“SOFR and other alterative reference rates represent the future, introducing more certainty and greater integrity into financial markets,” Pimenta says.   

The announcement follows another bank first at US banking giant JP Morgan, which announced in August it had completed its first automated trade finance deal tied to CME’s 90-day SOFR forward rate. 

The trade was arranged between two bank clients: India’s Reliance Industries and an unnamed energy company in Singapore. It was executed just days after the ARCC endorsed CME’s series of forward-term SOFR benchmarks. 

Stuart Roberts, global head of trade at JP Morgan, told Bloomberg the transaction is “scalable and thus allows us to show there is a brave new world outside of Libor”. 

“That will cut the global systemic interbank risk that was systemic in Libor,” he said at the time. “Having term reference rates that are based off the benchmark in the US might also make the Eurodollar market significantly less volatile.” 

The announcements come as influential banks and industry groups urge companies to ensure they are prepared for the transition. 

“Time is running out,” Deutsche Bank warns in a statement issued on November 15. “Deutsche Bank encourages clients to actively transition legacy positions referencing benchmarks that are being discontinued.” 

The bank’s Ibor transition director for corporate banking, David McNally, adds: “If your company has not acted by now, it’s your last chance to ensure that you are adequately prepared for the end of Libor.” 

Although there are potential fallback provisions available to corporates, Deutsche Bank warns companies against relying on them. 

“The challenge with fallbacks is that they were historically designed to deal only with a temporary unavailability of a benchmark,” it explains, adding that fallback language might need amending in order to address the discontinuation of Libor benchmark rates. 

“All but the most recent loan products are unlikely to contain a hardwired or robust fallback, and therefore are expected to require amendment.” 

The importance of the transition has also been emphasised by the International Trade and Forfaiting Association (ITFA), in a paper jointly produced with Sullivan – a law firm specialising in trade finance. 

It notes that while much of the wider market will use reference rates compounded in arrears, the use of forward-looking rates is particularly pressing for trade finance lenders due to “the need for certainty at the outset of a transaction”. 

ITFA adds the rates are also likely to be used widely for the calculation of discount rates in receivables financing transactions, to determine the final amount to be paid to the customer. 

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