The Nation's Financial Condition

[Brooklyn]

Too bad you cannot give a substantive answer. Would make for a better exchange if you could. Keep trying.

[Farfromgeneva]

Lame. I’ve tried to have macroeconomic discussions with you and it ends up with you always acknowledging you’re just saying beliefs not grounding in any framework or theory tied to other related inputs and outputs on a regular basis.

The YOY GDP proclamation is stupid and when I point out how flawed your comment is you go on a once a month level rant about Trump. Get a tampon.

[PizzaSnake]

Time for a haircut. Snip, snip.

"At its most profound level, debt-financing public schools relies on problematic ideas of creditworthiness. For instance, Moody’s Investors Service, a pre-eminent credit-rating agency, bases a school district’s credit score on the district’s existing property value and residential income: The poorer the school district, the more it pays in interest and fees to borrow — from the point of view of creditors, such schools are “riskier.” The results of this process are unsurprisingly classist and racist. Funding schools by way of credit scores amounts to little more than operating a system of prejudices which ordains the haves with the capacity to have more, while chaining the have-nots to financial hardship."


"In 2021, the Philadelphia School District paid $311.5 million to service its debt. More than half — $162 million — went to Wall Street creditors as interest payments."

https://www.nytimes.com/2021/08/27/opin ... onomy.html

[Farfromgeneva]

Time for a haircut. Snip, snip.

"At its most profound level, debt-financing public schools relies on problematic ideas of creditworthiness. For instance, Moody’s Investors Service, a pre-eminent credit-rating agency, bases a school district’s credit score on the district’s existing property value and residential income: The poorer the school district, the more it pays in interest and fees to borrow — from the point of view of creditors, such schools are “riskier.” The results of this process are unsurprisingly classist and racist. Funding schools by way of credit scores amounts to little more than operating a system of prejudices which ordains the haves with the capacity to have more, while chaining the have-nots to financial hardship."


"In 2021, the Philadelphia School District paid $311.5 million to service its debt. More than half — $162 million — went to Wall Street creditors as interest payments."

https://www.nytimes.com/2021/08/27/opin ... onomy.html

Couple of things having traded some muni debt as well as having created some analytical tools for owners and performs occasional portfolio valution work in the muni space:

- The small oligopoly of credit ratings agencies (NSROs-govt designation) performs a rating evaluation of the probability of default. That’s based on a variety of factors that would go into assessing a borrowers ability to repay.
- They started out assessing the quality of corporate borrowers and have branches out into sovereign and structured credit but it remains to be seen if this small group effectively applying the corporate framework to these other areas is appropriate.
- The ratings agencies are flawed no doubt but their job is ranking any borrowers ability to repay as agreed and that’s what a credit rating represents.
- The major factors I’ve seen into strength of municipal issuer generally include debt/assessed value, tax rate/assessed value (north of 3.5% is not good), tax revenues/total debt, population growth and then some more qualitative factors such as proportion of population with advanced degrees, quality and type of major employers, off balance sheet long term obligations (actually quantitative), etc.
- Bonds are basically issued as General Obligation (backed by the full faith and credit of the issuers taxing authority which means if they have to they’ll jack property taxes to pay off the debt due by legal requirement and those bonds are considered safer and are cheaper to
Borrower municipalities) and revenue bonds backed by a specific source of revenue and only that source though if they are tied to “essential services” (utilities, schools, water/sewer and occasionally a few other types) there is usually accepted a non legal “moral obligation” in that it’s essential to the existence of the municipality.
- Municipal issuer/borrowers are some of the worst at preprint and delivering their own audited financials in a timely manner as legally required. Like criminal level results across the universe including many larger systems.
- Markets price debt as an risk free rate for the term plus a credit spread to account for the risk of loss (expected loss = probability of default * loss given default/loss severity). Fiduciaries (asset managers, pension funds, mutual fund managers etc) are not supposed to price or evaluate buy/sell decisions based on credit rating at all (buy/sell decisions create a market equilibrium price acknowledging liquidity blows in the muni market which still trades secondaries like it’s the Wild West due to so much held in high retail/lower middle market account lot sizes). Fill/kill and pricing should be independent and ratings should be a support for the decision.
- Reality is for a few structural market reasons ratings are
tied to pricing wayyyy too much. One is the asset management industry comps its portfolio managers based on performance against large benchmarks so they all tend to nut hug the benchmarks in performance with the same reference names and “diversity” in many overlapping books. Another is it’s the lazy way to do it.
- Pennsylvania is unique I recall as a non expert but seeing a sh*t-ton of cheap, lower IG rated pennsy school district paper and have subsequently gotten to know the execs of a few shops up there (Boenning and Scattergood and Janney Montgomery Scott) who underwrite a lot of that issuance. They have every school district act as its own issuer and then gets support via credit enhancement through a state program problem is PA is like BBB+ rated, or garbage, by state standards (see rte 80 quality as reference). So the if the state wanted to support poorer schools
Districts they fund more direct cash transfers to those places than the worthless system they have in place now.

So thought these considerations were important before flipping the entire market upside down, it generally functions fine for what it’s supposed to do but it’s how the states and localities operate around it which needs to be scrutinized IMO.

[PizzaSnake]

Time for a haircut. Snip, snip.

"At its most profound level, debt-financing public schools relies on problematic ideas of creditworthiness. For instance, Moody’s Investors Service, a pre-eminent credit-rating agency, bases a school district’s credit score on the district’s existing property value and residential income: The poorer the school district, the more it pays in interest and fees to borrow — from the point of view of creditors, such schools are “riskier.” The results of this process are unsurprisingly classist and racist. Funding schools by way of credit scores amounts to little more than operating a system of prejudices which ordains the haves with the capacity to have more, while chaining the have-nots to financial hardship."


"In 2021, the Philadelphia School District paid $311.5 million to service its debt. More than half — $162 million — went to Wall Street creditors as interest payments."

https://www.nytimes.com/2021/08/27/opin ... onomy.html

Couple of things having traded some muni debt as well as having created some analytical tools for owners and performs occasional portfolio valution work in the muni space:

- The small oligopoly of credit ratings agencies (NSROs-govt designation) performs a rating evaluation of the probability of default. That’s based on a variety of factors that would go into assessing a borrowers ability to repay.
- They started out assessing the quality of corporate borrowers and have branches out into sovereign and structured credit but it remains to be seen if this small group effectively applying the corporate framework to these other areas is appropriate.
- The ratings agencies are flawed no doubt but their job is ranking any borrowers ability to repay as agreed and that’s what a credit rating represents.
- The major factors I’ve seen into strength of municipal issuer generally include debt/assessed value, tax rate/assessed value (north of 3.5% is not good), tax revenues/total debt, population growth and then some more qualitative factors such as proportion of population with advanced degrees, quality and type of major employers, off balance sheet long term obligations (actually quantitative), etc.
- Bonds are basically issued as General Obligation (backed by the full faith and credit of the issuers taxing authority which means if they have to they’ll jack property taxes to pay off the debt due by legal requirement and those bonds are considered safer and are cheaper to
Borrower municipalities) and revenue bonds backed by a specific source of revenue and only that source though if they are tied to “essential services” (utilities, schools, water/sewer and occasionally a few other types) there is usually accepted a non legal “moral obligation” in that it’s essential to the existence of the municipality.
- Municipal issuer/borrowers are some of the worst at preprint and delivering their own audited financials in a timely manner as legally required. Like criminal level results across the universe including many larger systems.
- Markets price debt as an risk free rate for the term plus a credit spread to account for the risk of loss (expected loss = probability of default * loss given default/loss severity). Fiduciaries (asset managers, pension funds, mutual fund managers etc) are not supposed to price or evaluate buy/sell decisions based on credit rating at all (buy/sell decisions create a market equilibrium price acknowledging liquidity blows in the muni market which still trades secondaries like it’s the Wild West due to so much held in high retail/lower middle market account lot sizes). Fill/kill and pricing should be independent and ratings should be a support for the decision.
- Reality is for a few structural market reasons ratings are
tied to pricing wayyyy too much. One is the asset management industry comps its portfolio managers based on performance against large benchmarks so they all tend to nut hug the benchmarks in performance with the same reference names and “diversity” in many overlapping books. Another is it’s the lazy way to do it.
- Pennsylvania is unique I recall as a non expert but seeing a sh*t-ton of cheap, lower IG rated pennsy school district paper and have subsequently gotten to know the execs of a few shops up there (Boenning and Scattergood and Janney Montgomery Scott) who underwrite a lot of that issuance. They have every school district act as its own issuer and then gets support via credit enhancement through a state program problem is PA is like BBB+ rated, or garbage, by state standards (see rte 80 quality as reference). So the if the state wanted to support poorer schools
Districts they fund more direct cash transfers to those places than the worthless system they have in place now.

So thought these considerations were important before flipping the entire market upside down, it generally functions fine for what it’s supposed to do but it’s how the states and localities operate around it which needs to be scrutinized IMO.

So bond issuance such as this are the wrong kind of financing for public education due to their pernicious continuance of societal imbalance.

If not these, then what vehicle should be used to overcome the endemic imbalance (which, it could be argued, was a deliberate result of white flight and the re-segregation of the public school system). Or are we just giving lip-service to the divide that exists in this country which is the real threat to our union?

[Farfromgeneva]

Time for a haircut. Snip, snip.

"At its most profound level, debt-financing public schools relies on problematic ideas of creditworthiness. For instance, Moody’s Investors Service, a pre-eminent credit-rating agency, bases a school district’s credit score on the district’s existing property value and residential income: The poorer the school district, the more it pays in interest and fees to borrow — from the point of view of creditors, such schools are “riskier.” The results of this process are unsurprisingly classist and racist. Funding schools by way of credit scores amounts to little more than operating a system of prejudices which ordains the haves with the capacity to have more, while chaining the have-nots to financial hardship."


"In 2021, the Philadelphia School District paid $311.5 million to service its debt. More than half — $162 million — went to Wall Street creditors as interest payments."

https://www.nytimes.com/2021/08/27/opin ... onomy.html

Couple of things having traded some muni debt as well as having created some analytical tools for owners and performs occasional portfolio valution work in the muni space:

- The small oligopoly of credit ratings agencies (NSROs-govt designation) performs a rating evaluation of the probability of default. That’s based on a variety of factors that would go into assessing a borrowers ability to repay.
- They started out assessing the quality of corporate borrowers and have branches out into sovereign and structured credit but it remains to be seen if this small group effectively applying the corporate framework to these other areas is appropriate.
- The ratings agencies are flawed no doubt but their job is ranking any borrowers ability to repay as agreed and that’s what a credit rating represents.
- The major factors I’ve seen into strength of municipal issuer generally include debt/assessed value, tax rate/assessed value (north of 3.5% is not good), tax revenues/total debt, population growth and then some more qualitative factors such as proportion of population with advanced degrees, quality and type of major employers, off balance sheet long term obligations (actually quantitative), etc.
- Bonds are basically issued as General Obligation (backed by the full faith and credit of the issuers taxing authority which means if they have to they’ll jack property taxes to pay off the debt due by legal requirement and those bonds are considered safer and are cheaper to
Borrower municipalities) and revenue bonds backed by a specific source of revenue and only that source though if they are tied to “essential services” (utilities, schools, water/sewer and occasionally a few other types) there is usually accepted a non legal “moral obligation” in that it’s essential to the existence of the municipality.
- Municipal issuer/borrowers are some of the worst at preprint and delivering their own audited financials in a timely manner as legally required. Like criminal level results across the universe including many larger systems.
- Markets price debt as an risk free rate for the term plus a credit spread to account for the risk of loss (expected loss = probability of default * loss given default/loss severity). Fiduciaries (asset managers, pension funds, mutual fund managers etc) are not supposed to price or evaluate buy/sell decisions based on credit rating at all (buy/sell decisions create a market equilibrium price acknowledging liquidity blows in the muni market which still trades secondaries like it’s the Wild West due to so much held in high retail/lower middle market account lot sizes). Fill/kill and pricing should be independent and ratings should be a support for the decision.
- Reality is for a few structural market reasons ratings are
tied to pricing wayyyy too much. One is the asset management industry comps its portfolio managers based on performance against large benchmarks so they all tend to nut hug the benchmarks in performance with the same reference names and “diversity” in many overlapping books. Another is it’s the lazy way to do it.
- Pennsylvania is unique I recall as a non expert but seeing a sh*t-ton of cheap, lower IG rated pennsy school district paper and have subsequently gotten to know the execs of a few shops up there (Boenning and Scattergood and Janney Montgomery Scott) who underwrite a lot of that issuance. They have every school district act as its own issuer and then gets support via credit enhancement through a state program problem is PA is like BBB+ rated, or garbage, by state standards (see rte 80 quality as reference). So the if the state wanted to support poorer schools
Districts they fund more direct cash transfers to those places than the worthless system they have in place now.

So thought these considerations were important before flipping the entire market upside down, it generally functions fine for what it’s supposed to do but it’s how the states and localities operate around it which needs to be scrutinized IMO.

So bond issuance such as this are the wrong kind of financing for public education due to their pernicious continuance of societal imbalance.

If not these, then what vehicle should be used to overcome the endemic imbalance (which, it could be argued, was a deliberate result of white flight and the re-segregation of the public school system). Or are we just giving lip-service to the divide that exists in this country which is the real threat to our union?

To first part at least the way Pennsylvania does it but perhaps for all. Have to compare with other forms of financing both operating working capital needs (TAN - Tax anticipation notes for when cash collections don’t match up w expenses for a few months) and capital expenditures. I’d argue for capex that installment type muni bonds (maturities or series within an issuance get retired each year with a huge chunk in a longer dated maturity) but rolling over any working capital in bond financings are a joke. If a bank has a borrower with a revolving working capital line of credit and it doesn’t have at least a one month clean up (paid facility down to zero) the bank will make you pull a piece of the debt off the line and term it out which is to say amortize it or have a principal balance curtailment. You don’t finance working capital over longer periods of time that’s a sign of financial mismanagement.

Ironically banks could get the tax exemption, avoid the TEFRA deduction (banks have to deduct the cost of their money from the gross post tax yield which strips all the juice at 1-2% cost of funds for larger issues) of larger issuances since banks can only own municipal bonds in securities portfolios and get the full deductibility benefit if they are small issuances of $20mm or less called “Bank Qualified” bonds. That’s the whole issuance so tiny and illiquid but get priced dirt cheap because the banks soak it up and it’s how they try to squeeze extra juice out of their low yielding securities liquidity books (banks own bonds in order to have easy cash for runs on deposits basically while making a few scraps over zero for that money which is a drag on returns for the sake of “safety and soundness” (regulatory term). However they could make a $50mm loan to a larger school district in its loan book and get the full tax deductibility. Ironically large school districts rally don’t do better in bond markets than they would in a broadly syndicated municipal loan.

Another messed up part is the regulators allow GO bonds to be calculated as 1/5 of an asset for leverage calculations. Revenue bonds at 1/2. In other words if you loaded up on GO bonds you could be leveraged in the real world or economically 50:1 by owning just GO bonds. It’s how they calculate risk baaed capital and another reason I can’t stand so much govt involvement in stuff they don’t understand at all. Only makes it worse. I could make an easy case that subsisdies to higher education, SFR home ownership and sovereign debt through Basel protocols which was designed to lower the risk profile of government debt and allow liquidity and cheaper cost of money to governments through this incentive for the global banking system to own govt debt are alone 95% of the reason for the financial driven recessions since at least Black Monday (what is the fault of the Nobel Prize for Economics board for bestowing one on the clown who created portfolio insurance and should’ve certified that academics have to get out of practice in general but then we had Merton and his homeboys at Long Term Capital Mgt a decade after Black Monday...). Basel originally allowed banks to tie ratings to scoring for weighting assets but I could own as much Icelandic debt as I want an it’s not treated like I’m holding an asset as far as the numerator goes. Now w 2 & 3 they just “map” the ratings to the risk scoring. But all the cash those dumb European and Asian institutions could fund their positions super cheaply thanks to Basel even if they threw the crap in an SIV that was a Re-remic of existing bonds into something new and sold it back to larger US banks as short duration sovereign low risk weighted credit. The rest of the world was playing a carry trade into 2008-2009 because of Basel basically.

I think it should be direct funding on books of governments as their obligation and have professional organizations that report financials in a timely manner as any business would be expected to do. Segregate the funds at the municipal level and f guarantees and credit insurance if a state or larger body is supporting the school district do it with direct cash. The notion that there’s some arbitrage by providing a guarantee or backup for payment is moronic and defies kiddie finance. The guarantor is carrying a cost (counterparty, their own debt costs, etc) so just make it a straight cash homie transfer payment.

I don’t know if cleaning up operations, truly separating working capital and cap ex in financial planning of the entities and straight cash transfers in lieu of credit instance and other support but if it didn’t it would make a vast improvement and we’d know the answer from there for sure.

[Farfromgeneva]

If I’ve got you lubed up on this topic there is a system under MSRB (municipal securities rulemaking board I believe) called EMMA that has all filed info on every muni bind issued including secondary price trades as they have to be reported within 15 min of a trade or you get fined by FINRA.

Here’s Philly school district. If you drill down you can see offeringdocs, entity financial statements and all secondary trades by price or yield.

https://emma.msrb.org/IssuerHomePage/Is ... 4DADE99237

[Farfromgeneva]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

[lagerhead]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

[Farfromgeneva]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

Ultimately for the banks it’s going to be what the “safety and soundness” experts who oversee them desire. Unfortunately the Fed Reserve, FDIC, OCC and state banking commissions never will say anything in advance. I’ve seen all sorts of strategic and wholesale discussions with various banks and their regulators and at best you get a non committal maybe in a round about way. The banks have to fly blind and do the best they can and if they mess up even if out of their control the regulators will hit them of their exit with a MRA (matter requiring attention) and if you don’t clean it up by the next exam they’ll hit you with real consequences.

In my experience banking regulators suck. KSAs are equivalent to (as one bank CEO described them to me as) Junior college dropouts. They operate like crappy unskilled district attorneys won’t let an allegation or charge drop unless hand forced so they can pile on if something else completely unrelated happens but doesn’t have the balls to step up at the time of the concerning event.

[Farfromgeneva]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

ICE does well with corporate and other esoteric credit derivatives.

[lagerhead]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

ICE does well with corporate and other esoteric credit derivatives.

Sprecher and Tom Farley made a good team, jumped on buying data and data companies in equities, commodities and derivatives to license. No comment on Kelly.

[Farfromgeneva]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

ICE does well with corporate and other esoteric credit derivatives.

Sprecher and Tom Farley made a good team, jumped on buying data and data companies in equities, commodities and derivatives to license. No comment on Kelly.

I will, she sucks. Marketing chick who married the CEO and sprayed his money all around the state to buy a seat she couldn’t hang onto despite having backed and supported almost every winning local rep for a decade and they still didn’t back her up. WNBA has a lot of issues but I’ve never seen a team hate their owner as much and I’m including Donald Sterling and how Dave Winfield feels about George Steinbrenner in this as well so that’s saying a lot.

Still crazy to me that ICE owns the N.Y. Stock Exchange now. I worked with them a number of years back on a receivables marketplace venture between NYSE and Bain capital that blew up spectacularly. Nobody has figured out CP or Trade finance since the financial crisis so it made sense but they had the wrong people. Hell I got a $100k fee plus some upside for setting them up with a webinar for clients, 10 direct meetings and one to two other deliverables but the margins are so think even with some bank adopters buying a few hundred million notional it isn’t a ton of rev, like the CD underwriting business short term debt only makes money for intermediaries if it’s rolled over as if longer term credit (one CFO formerly in NC now in Dallas at different bank liked to buy corporate receivables on his lunch break he told me it made him feel like a trader).

[lagerhead]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

ICE does well with corporate and other esoteric credit derivatives.

Sprecher and Tom Farley made a good team, jumped on buying data and data companies in equities, commodities and derivatives to license. No comment on Kelly.

I will, she sucks. Marketing chick who married the CEO and sprayed his money all around the state to buy a seat she couldn’t hang onto despite having backed and supported almost every winning local rep for a decade and they still didn’t back her up. WNBA has a lot of issues but I’ve never seen a team hate their owner as much and I’m including Donald Sterling and how Dave Winfield feels about George Steinbrenner in this as well so that’s saying a lot.

Still crazy to me that ICE owns the N.Y. Stock Exchange now. I worked with them a number of years back on a receivables marketplace venture between NYSE and Bain capital that blew up spectacularly. Nobody has figured out CP or Trade finance since the financial crisis so it made sense but they had the wrong people. Hell I got a $100k fee plus some upside for setting them up with a webinar for clients, 10 direct meetings and one to two other deliverables but the margins are so think even with some bank adopters buying a few hundred million notional it isn’t a ton of rev, like the CD underwriting business short term debt only makes money for intermediaries if it’s rolled over as if longer term credit (one CFO formerly in NC now in Dallas at different bank liked to buy corporate receivables on his lunch break he told me it made him feel like a trader).

The entire ICE IT stack for anything but equities is built on Enron technology.

[Farfromgeneva]

Hey Lagerhead if your still keeping an eye here this may be interesting.

https://www.newyorkfed.org/medialibrary ... of_Use.pdf

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate1 Background:
In 2014, the ARRC selected SOFR as its recommended replacement rate for USD LIBOR. SOFR was selected after careful consideration of alternatives, given the robust underpinning of the US Treasury repo market following an extensive public consultation and as documented in the ARRC’s Second Report. In that same report, the ARRC recognized that there could be certain conditions where adapting to an overnight rate could be more difficult and thus explicitly included a goal of producing a forward- looking term rate for use in cash products in its Paced Transition Plan. The ARRC has selected and plans to formally recommend the CME SOFR term rates (SOFR Term Rate) once the indicators are met.
This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC,2 that use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market and should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves. Like all of the ARRC best practices, the extent to which any market participant decides to implement or adopt any benchmark rate is voluntary. Therefore, each market participant should make its own independent evaluation and decision about whether or to what extent any recommendation is adopted.
Market participants are encouraged to remain attuned to use of the SOFR Term Rate over time given the importance that such use continues to be proportionate to the base of transactions underlying the SOFR Term Rate, and does not materially detract from those transactions in a way that compromises the robustness of the SOFR Term Rate itself as the market evolves, as outlined in the ARRC’s principles.
Use of the SOFR Term Rate in Legacy Contracts that Have Adopted ARRC Fallback Language
The ARRC has issued recommended fallback language for market participants’ voluntary use in contracts that reference USD LIBOR, with the goal of reducing the risk of serious market disruption when LIBOR is no longer usable. The ARRC made separate recommendations of language appropriate for LIBOR-based floating rate notes, bilateral business loans, syndicated loans, securitizations, residential adjustable rate mortgages, and private student loans. These recommendations were made after widespread market consultation, which showed that the clear majority of respondents preferred to fallback to an ARRC- recommended SOFR term rate in order to support the smooth transition of legacy contracts away from LIBOR. For this reason, although the ARRC recognized that falling back to other forms of SOFR would be in line with its principles, under the recommended contract language for floating rate notes, bilateral and syndicated business loans, and securitizations, the first step of the fallback waterfall is a forward- looking, SOFR-based term rate (provided one has been recommended in the appropriate tenor) by the
1 Updated 8/27/2021 For more information see the FAQs on Best Practice Recommendations Related to Scope of Use of the Term Rate.
2 The scope of use recommendations are also in line with guidance issued by the FSB.
ALTERNATIVE REFERENCE RATES COMMITTEE

ARRC.3 Accordingly, following the formal recommendation of the SOFR Term Rate, legacy contracts that have adopted the ARRC’s fallback language without modification to the rate waterfall will, if the relevant tenor exists, fall back to the SOFR Term Rate once the contractual LIBOR replacement date occurs.
Under the legislation recently enacted by New York State, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York. The ARRC expects to make recommendations for the legislation that are consistent with its existing recommended fallback provisions.
Recommended Best Practices for Use of the SOFR Term Rate in New Contracts
For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates such as floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations. The ARRC also recommends the use of overnight SOFR and SOFR averages in cases where a party wishes to hedge in the most efficient and transparent manner. However, the ARRC also supports the use of the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven to be difficult.
Specifically:
1. The ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity —particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties. The ARRC also recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR.
2. The ARRC does not support the use of the SOFR Term Rate for the vast majority of the derivatives markets, because these markets already reference SOFR compounded in arrears and transitioning derivatives markets to the more robust overnight risk-free rates (RFRs) is essential to ensure financial stability as emphasized by the Financial Stability Board.4 The ARRC
3 ARRC-recommended language for consumer products refers to the rate recommended by the ARRC for such products. As with other products, consultations indicated that most market participants also preferred to fall back to a SOFR Term Rate if the ARRC had recommended one.
4 The FSB has stated, “Because derivatives represent a particularly large exposure to most IBORs, and because these prospective RFR-derived term rates can only be robustly created if derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that transition of derivatives to the more robust overnight RFRs is important to ensuring financial stability.”
ALTERNATIVE REFERENCE RATES COMMITTEE

recommends that any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the SOFR Term Rate. This limitation is intended to avoid use that is not in proportion to, or materially detracts from, the depth of transactions in the underlying derivatives markets that are essential to the construction of the SOFR Term Rate over time.

CME will not enter into derives license for data so no one else can use the term rate. CME is a monopoly in everything but energy, ice competes with them there.

ARRC has recommended to cftc that a sofr yet rate can’t be used in derivatives.

ARRC pushing a SOFR and telling banks BSBY and AMERIBOR are not ARRC supported risk free rates. Tom Wipf is an ass who should have been shown the door at MS long ago. Empty suit.

ICE does well with corporate and other esoteric credit derivatives.

Sprecher and Tom Farley made a good team, jumped on buying data and data companies in equities, commodities and derivatives to license. No comment on Kelly.

I will, she sucks. Marketing chick who married the CEO and sprayed his money all around the state to buy a seat she couldn’t hang onto despite having backed and supported almost every winning local rep for a decade and they still didn’t back her up. WNBA has a lot of issues but I’ve never seen a team hate their owner as much and I’m including Donald Sterling and how Dave Winfield feels about George Steinbrenner in this as well so that’s saying a lot.

Still crazy to me that ICE owns the N.Y. Stock Exchange now. I worked with them a number of years back on a receivables marketplace venture between NYSE and Bain capital that blew up spectacularly. Nobody has figured out CP or Trade finance since the financial crisis so it made sense but they had the wrong people. Hell I got a $100k fee plus some upside for setting them up with a webinar for clients, 10 direct meetings and one to two other deliverables but the margins are so think even with some bank adopters buying a few hundred million notional it isn’t a ton of rev, like the CD underwriting business short term debt only makes money for intermediaries if it’s rolled over as if longer term credit (one CFO formerly in NC now in Dallas at different bank liked to buy corporate receivables on his lunch break he told me it made him feel like a trader).

The entire ICE IT stack for anything but equities is built on Enron technology.

Doesn’t surprise me. I’m not a tech guy much at all but have seen my share of enterprise systems for better or worse over the years. The exchanges shouldn’t be public. I’m not suggesting they be forced into it, but it just feels like at best a public utility. And some of the management is pretty “mediocre”. Have you met the current NASDAQ CEO? I have...momma once said if you have nothing nice to say...

[lagerhead]

^^^ No have not met Ms Friedman.

[Farfromgeneva]

^^^ No have not met Ms Friedman.

Not missing much. For someone who’s had as much airtime as she has lately she’s terrible in front of audiences. Doesn’t look close to comfortable in her skin in one on ones, small groups or larger. Just seems like a spazz who kisses a** and doesn’t want to rock any boats but play cheerleader all day and night.

[Farfromgeneva]

The overlooked perils of gig work
Erica Pandey
Erica Pandey, author of What's Next
Illustration of a giant hole in the ground shaped like a briefcase
Illustration: Sarah Grillo/Axios
Not only does gig work come with low and unpredictable wages, but gig workers — who make up an increasing percentage of the workforce — can also have a difficult time accessing government benefits and social services.

What's happening: While plenty of resources exist to help gig workers find jobs, new apps like Steady are helping them access the types of career support, mentoring and benefits that on-the-books corporate employees enjoy.

The problem: Our society is structured to support people in traditional jobs, but more and more people are doing gigs — and getting left behind.

Income verification: Many gig workers are classified as independent contractors, and many are making money from a number of gigs, which makes it hard — or even impossible — to verify income and qualify for benefits.
Benefits: Gig workers were not eligible for unemployment insurance before the CARES Act, and they're still not eligible for some other temporary benefits, including COVID-19 paid leave. The pandemic exposed these issues, Alex Rosenblat of the Aspen Institute writes in the Harvard Business Review.
Federal assistance: It's also difficult for gig workers to qualify for types of assistance like SNAP benefits and Medicaid, says Adam Roseman, co-founder of Steady, a financial services app for gig workers.
What's happening: There are as many as 55 million gig workers in the U.S. — and that number is only rising as the pandemic pushes more people into delivery jobs.

"But gig work's flexibility comes at the cost of stability," says Shelly Steward, director of the Future of Work initiative at the Aspen Institute.
Driving the news: Steady is out with a new feature called Income Passport, which verifies gig workers' income so they can more seamlessly access benefits.

One of the key resources gig workers lack is data about their career trajectories and opportunities for new jobs or growth, Roseman says. They also lack career support and guidance from colleagues and managers.
Steady is attempting to provide that by creating an online platform for gig workers that compiles data on their earnings, clues them in on new job opportunities and even offers cash to tide them over during hard times.
"It's like a hub for gig workers," says Denae, a gig worker in Baltimore and a user of the app. "It bridges the gap for me." When Denae crashed her car — her main source of income as a delivery and ride-share driver — Steady sent her money for groceries.
Shaquille O'Neal, the former NBA player and a co-founder of Steady, reminded Axios in an interview that gig work was around long before the pandemic. "This is reality," he said. "This is what my parents did. My dad drove trucks on the weekends to buy me shoes."
What to watch: Look for the rise in gig work to give rise to even more startups to provide resources and data to the workers.

[Brooklyn]

Only 235,000 new jobs created in August - how surprising that right wing crybabies aren't claiming Biden is a "failure" for creating so few jobs and how much better it would be if tRump was in the White House.

[Farfromgeneva]

Shrinking communities, there was a conversation about BMorecently, are susceptible to this long term obligation issue.

CREDIT MARKETS
Main Street Pensions Take Wall Street Gamble by Investing Borrowed Money
Municipalities have assumed about $10 billion in debt this year to shore up retirement obligations

By Heather Gillers | Photos by Julie Bidwell for The Wall Street Journal
Sept. 4, 2021 1:00 pm ET

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Many U.S. towns and cities are years behind on their pension obligations. Now some are effectively planning to borrow money and put it into stocks and other investments in a bid to catch up.

State and local governments have borrowed about $10 billion for pension funding this year through the end of August, more than in any of the previous 15 full calendar years, according to an analysis of Bloomberg data by Municipal Market Analytics. The number of individual municipalities borrowing for pensions soared to 72 from a 15-year average of 25.

Among those considering what is known as pension obligation borrowing is Norwich, a city in southeastern Connecticut with a population of 40,000. Its yearly payment toward its old pension debts has climbed to $11 million in 2022—four times the annual retirement contribution for current workers and 8% of the city’s budget. The city will vote in November on whether to sell $145 million in 25-year bonds to cover the pensions of retired police officers, firefighters, city workers and school employees.

Borrowing Time
State and local governments have borrowed more to cover pensionliabilities in the first eight months of 2021 than in any of the previous 15years
Bonds issued for pension funding
Source: Municipal Market Analytics analysis of Bloomberg data
Notes: 2021 data is through Aug. 31; some bonds also include money for otherpurposes
2006
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'15
'20
0
2
4
6
8
10
$12
billion
Norwich’s rating from Moody’s Investors Service is in line with the median for U.S. cities, and officials expect to pay about 3% in interest. Norwich’s pension consultant, Milliman, projects investment returns of 6.25%.


Comptroller Josh Pothier said that spread helped him overcome his initial hesitation. “It’s pretty scary; it’s kind of like buying on margin,” he said he thought to himself. “But we’ve had a long run of interest rates being extraordinarily low,” he added.

Milliman forecasts that Norwich would save $43 million in today’s dollars over the next 30 years.

Over the past few decades, state and local governments across the country have fallen hundreds of billions of dollars behind on savings needed to pay public employees’ future promised pension benefits. Officials have been trying to catch up by cutting expenses from annual budgets and making aggressive investment bets.


Norwich, with a population of 40,000, is one of many smaller municipalities venturing into pension borrowing.
With big pension payments looming and Covid-19-era federal stimulus pushing municipal borrowing costs to record lows, local officials are taking a gamble: that their retirement plans can earn more in investment income on bond money than they pay in interest.

Here is how a pension obligation bond works: A city or county issues a bond for all or a portion of its missed pension payments and dumps the proceeds into its pension coffers to be invested. If the returns on pension investments are higher than the bond rate, the additional investment income will translate into lower pension contributions for the city or county over time. (The $10 billion in pension borrowing captured by the Municipal Market Analytics analysis also included some money used directly for pension benefits, rather than being invested, and at least one borrower directed some bond proceeds to other uses.)

Pension obligation bonds can backfire. If investments don’t perform as expected and returns fall below the bond interest rate, the city can end up paying even more than if it hadn’t borrowed.

Norwich is one of many smaller municipalities venturing into pension borrowing. This summer local governments issued 24 pension obligation bonds with an average size of $112 million, according to data from ICE Data Services. That compares with 11 deals with an average size of $284 million during the same period last year.



Norwich’s rating from Moody’s Investors Service is in line with the median for U.S. cities.
The Government Finance Officers Association, a trade group, in February reaffirmed its recommendation against the practice. “Absolutely nothing has changed,” said Emily Brock, director of the group’s federal liaison center. “It’s still not a good choice.”

In 2009, Boston College’s Center for Retirement Research examined pension obligation bonds issued since 1986 and found that most of the borrowers had lost money because their pension-fund investments returned less than the amount of interest they were paying. A 2014 update found those losses had reversed and returns were exceeding borrowing costs by 1.5 percentage points.

By swapping out their pension liability for bond debt, local pension borrowers give up the budgetary flexibility to skip a retirement payment in an acute crisis. Pension obligation bonds have contributed to the chapter 9 bankruptcies of Detroit, Stockton, Calif., and San Bernardino, Calif. Chicago three years ago considered, and then scrapped, plans for a big pension borrowing deal.

SHARE YOUR THOUGHTS

Should public pensions invest borrowed money? Join the conversation below.

Other local officials are starting to educate themselves about the deals. More than 200 people attended the webinar “How to Explain Pension Obligation Bonds to Your Governing Board,” hosted by the law firm Orrick, Herrington & Sutcliffe last month.

For investors, the bonds can be more of a mixed bag. A pension obligation bond approved by Houston voters in 2017 earned praise from analysts because the city paired it with benefit cuts.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said that though he occasionally purchases the securities, the decision to issue them raises red flags. “I have a lot more questions about how an entity is governed if they’re using this tactic,” Mr. Cure said.



Norwich would save an expected $43 million in today’s dollars over the next 30 years.
Write to Heather Gillers at [email protected]