Tuesday, August 1, 2017
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Robert Brickson • Kevin Doyle • Lonnie Harris • Larry Russell •  Mark Tranckino • Robert Schuyler  Tom Toburen • Josh Kiefer • Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
7/24/17	1.00	1.17	1.12	1.23	1.37	1.53	1.83	2.07	2.26	2.59	2.83
7/25/17	.96	1.18	1.15	1.24	1.40	1.56	1.90	2.15	2.33	2.67	2.91
7/26/17	1.02	1.13	1.14	1.23	1.36	1.50	1.83	2.09	2.29	2.65	2.89
7/27/17	1.01	1.11	1.13	1.22	1.36	1.52	1.84	2.12	2.32	2.68	2.93
7/28/17	1.00	1.08	1.13	1.22	1.34	1.51	1.83	2.10	2.30	2.65	2.89
7/31/17	1.00	1.07	1.13	1.23	1.34	1.51	1.84	2.11	2.30	2.66	2.89

                                            

                                                 Big Changes Ahead for Markets

 

On July 28^th, the FCA (Financial Conduct Authority) announced that the ICE LIBOR rate (Intercontinental Exchange London Interbank Offered Rate) would be phased out and eliminated by 2021.

This could have potentially huge implications to the secondary mortgage market and more importantly, to the swaps and derivatives markets, which had nearly $500BLN in notional value in 2016.

 

“The London Interbank Offered Rate is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks. It is usually abbreviated or LIBOR, or more officially to ICE LIBOR (for Intercontinental Exchange Libor). It was formerly known as BBA Libor (for British Bankers' Association) before the responsibility for the administration was transferred to Intercontinental Exchange. It is the primary benchmark, along with the Euribor, for short-term interest rates around the world.

 

It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the ICE surveys a panel of banks (18 major global banks for the USD Libor), asking the question, "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am?" The ICE throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23% trimmed mean.”

 

For the MBS market, there appears to be provisions within the Official Statements anticipating a change in the index used, so that is good news for MBS ARM holders. It is less certain as to whether this provision allows for the spread to be adjusted to reflect this new index (and caps, floors and ceilings). This is still early in the process, and many expect this issue to be resolved well before 2021.

 

The more difficult issue is with the swaps market. Although there is also a provision for allowing another index if the original index is no longer available, the problem is bigger than just the index. Since both sides of the swap are said to be ”equal in value” at inception, does changing the valuing methodology throw off the delicate “hedge accounting” that prevents many of these swaps from having to be written down through the income statement? Again, many expect the pertinent regulatory authorities to address this issue long before  2021, however this is going to be an issue to watch.

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

•Not FDIC Insured •No Bank Guarantee •May Lose Value