An IBA January consultation aimed to address the credit-spread issue by proposing an index reflecting banks' cost of funds derived from wholesale, unsecured, primary-market funding transactions, including interbank deposits and institutional certificates of deposit, commercial paper, and secondary-market bond transactions. IBA would use that data to generate the U.S. Dollar ICE Bank Yield Index (BYI), a yield curve with one-month, three-month and six-month term settings.
The forward-looking credit spread would be constructed daily using a rolling average of the last five days of transactions.
The July update proposes placing the BYI on top of the implied term-SOFR yield curve, comprising one-, three- and six-month settings, based on methodology described in a working paper by Federal Reserve economists, Inferring Term Rates from SOFR Futures Prices.
“Trading in near-term SOFR futures is more robust, so the short end of the curve is becoming more reliable. We're increasingly getting a better handle on term SOFR out to 1.5 to 2 years,” Hoffman said, adding that going out further requires modeling adjustments to proxy data.