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Potential challenges of a synthetic LIBOR




Most active market participants were looking forward to the LIBOR cessation or pre-cessation announcement to provide certainty for the end of LIBOR. This was provided by FCA on 5th March 2021 as a pre-cessation or ‘loss of representativeness’ announcement which triggered many contracts to move to the fallbacks at a future date.

However, another component of the announcement was the proposed consultation on ‘synthetic LIBOR’ for GBP (and probably JPY as well) which may be applied to contracts without the pre-cessation trigger. This means that LIBOR can be effectively continued for contracts not subject to the pre-cessation trigger because IBA will still publish LIBOR under a methodology directed by FCA.

Although this looks like a good solution to the vexed problem of ‘tough legacy’ (i.e. trades or contracts where it is not feasible to replace the fallbacks in a timely manner) this is not without challenge.

What is the synthetic LIBOR methodology going to be? Should it follow the term SONIA plus a fixed here, and Butterflies and Switches here.” class=”glossaryLink ” target=”_blank”>spread? Or should the spread be dynamic and follow market credit and liquidity changes?

Different products and users of those products may prefer (or require) very different characteristics from the new methodology to maintain the integrity of those products.

A product approach

Different products may actually prefer different forms of synthetic LIBOR. In some cases, a dynamic credit spread may be essential but for other products a fixed spread similar to the ISDA version may be more appropriate.

This is an example where a dynamic spread may be preferred:

Short-term, draw-down facilities (e.g. multi-currency revolving loans)

The reference rate is often short-term LIBOR which currently varies with underlying rates and liquidity in the markets. When short-term liquidity is low, the spread rises and the bank matches their funding costs to the lending rate on the facility.

If the spread was fixed, many banks have pointed out that these loans are problematic because market rates diverge from the fixed spread and the facility is undercharging for the drawdown.

In this case, a dynamic spread is preferred.

And here is an example where a fixed spread may be a better option:

Debt hedged with derivatives (e.g. debt issued and swapped to another currency)

Floating rate debt such as FRNs are often issued in one currency and swapped to another currency using cross currency swaps. If the derivative has a fallback which is based on the ISDA approach (i.e. fixed spread) then the FRN, if it remains on LIBOR, would be better hedged with a synthetic LIBOR similar in methodology to the ISDA approach using a fixed spread.

These two simple examples show how different product can require quite different synthetic LIBORs to maintain their integrity and perform as expected.

Cliffs and steps for fallbacks – the dynamic versus fixed spread

I have previously looked at the challenges of cliffs and steps on the day the fallbacks become effective. Murex has also contributed to the debate and as we approach the 31st December 2021 there appears to be a real possibility of a step up in the rates applied post LIBOR.

Quite ironically in Q2 2020 when we first looked at the discontinuous curve around the transition to fallbacks we were expecting a cliff, i.e. a sharp fall in rates between 31st December2021 and 3rd January 2022 whereas now it is more likely to be a step up in rates.

Firstly a few charts from Clarus CHARM.

The first shows the 1-month GBP LIBOR and the median 5-year spread to the compounded SONIA. As we have discussed previously, LIBOR (the blue line) does move around relative to the 5-year median (white line)

If, for example, today was the 31st December 2021 then LIBOR would set at around 0.04738% but the following day (3rd January 2022) LIBOR would ‘step up’ to 0.08120% being the compounded SONIA 1 month (0.0486) plus 5-year median spread (0.0326). The Term SONIA is 0.0486% but we will deal with that later in the blog.

Figure 1: Libor 1-month

A very similar effect is seen in the 3-month chart with a step up from LIBOR at 0.08500% to 0.1702% comprised of compounded SONIA of 0.04860% and the 5-year median spread of 0.11930. Term SONIA is 0.0490% which will also be discussed later in the blog.

Figure 2: Libor 3-month

And the same effect is seen in the 6 month LIBOR chart below.

Figure 3: Libor 6-month

But the main feature of these charts is the fact that LIBOR is often very different to the compounded rate plus the spread and occasionally equal. LIBOR spends more time not equal to the compounded rate plus the spread.


A synthetic LIBOR needs to be forward-looking and Term SONIA appears to be a usable solution. However, the analysis here was done using the compounded, set in arrears SONIA because the Term SONIA historical rates are not available.

The variability of GBP LIBOR when compared with Term SONIA is expected to be similar to that described in this analysis. The decision of a synthetic LIBOR with a fixed or variable spread to the Term SONIA is still a matter for consultation.

Should the synthetic LIBOR follow the cliff or step?

While it is tempting to have synthetic LIBOR follow the path of the fallbacks with a cliff or spread effect there are some subtle differences.

If the name is correct, then a synthetic LIBOR could be expected to replicate LIBOR and vary from the ISDA fallbacks (compounded rate plus the fixed spread) as credit and liquidity conditions change.

The possible step up could disadvantage some participants who would see a sudden change in their borrowing rates creating winners and losers. The size and direction of the cliff or step will only be known on 31st December 2021 but is unlikely (see previous charts) to be zero.

Synthetic LIBOR with a fixed spread

If a fixed spread is used it will differ from the ISDA/Bloomberg spread for derivatives. The derivative spread is based on LIBOR minus the backward-looking compounded SONIA (note the timing difference) whereas the synthetic LIBOR spread would need to be calculated as the difference between LIBOR and the forward-looking SONIA. These spreads are potentially quite different.

In this case, the fixed spread would be unlikely to replicate the current LIBOR because the variable credit and liquidity spread is removed and replaced by a fixed 5-year median.

This could be advantageous for some products like longer-dated loans with swap hedges but also negatively impact other products like short-term drawdown facilities which are linked to actual cost of funds at that moment.

Synthetic LIBOR with a floating spread

If the spread is allowed to change and follow the market credit and liquidity changes (as does LIBOR) then such a synthetic LIBOR may be a better fit for some products which depend on replicating actual funding rates in the market. [As a side note, this was the original intent of LIBOR – to replicate actual borrowing rates.]

But how would such a dynamic spread be calculated each day? Although the process is not clear in GBP, the USD market is actively pursuing a ‘credit add-on’ for SOFR by IHSMarkit, IBA and Bloomberg.

It is possible and potentially suits some products to create a synthetic LIBOR more like the current LIBOR with a floating spread tracking actual funding rates.

Synthetic LIBOR

The question of the synthetic LIBOR methodology is the subject of an FCA consultation very soon. On one hand, a fixed spread added to the Term SONIA may be attractive for some participants while a variable spread added the Term SONIA be better suited to other participants.

If I assume there can only be one synthetic LIBOR (to avoid the obvious arbitrage opportunities) then a decision on the type of spread will be critical.

Inevitably there will be ‘winners’ and ‘losers’ whichever option is finally adopted.


The upcoming consultation on synthetic LIBOR by FCA will be very important as the outcome will impact different products and some participants quite substantially.

Should the spread be variable or fixed? And if it is variable, then how might this be calculated?

And as always, Clarus CHARM, Microservices and Clarus Data provide a necessary toolkit for managing your exposures.

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Banks turn to RPA to automate collections, compliance and core conversions




Banks are turning to robotic process automation (RPA) to automate collections, make core transitions and help with fraud and anti-money laundering compliance (AML) this year. Banks are automating loan collections because they’re anticipating a wave of loan defaults as COVID-related restrictions on collections expire, said Amit Kumar, vice president of financial services at RPA provider […]

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Wise Integrates With Google Pay to Allow U.S. Users to Transfer Funds to India & Singapore




Fintech Unicorn and stealth bank Wise announced on Tuesday it has integrated with Google Pay to allow U.S. users to transfer funds to friends and family in India as well as Singapore. Wise reported that through the integration, all Android and iOS Google Pay users in the U.S. may send money to another Google Pay user in India or Singapore.

“Later this year, we’ll work with Google to expand the integration and allow US Google Pay users to pay friends and family in the 80+ countries that Wise already sends to. So, the next time you need to send money overseas to family and friends, just Wise it over from Google Pay. It’ll be cheap, fast, and transparent.”

To send money with Wise in Google Pay:

  1. Update your GPay app to the latest version: Android or iOS
  2. Search for the person to send money to in the GPay app
  3. Click on Pay and select Wise
  4. Create a Wise account, or log in if already a Wise user
  5. Select the amount and currency to send
  6. Choose recipient from the list of past recipients or enter their bank details if this is the first time sending money to this person
  7. Pay using any debit card or credit card stored in GPay Wallet
  8. Users may track their money by clicking Check Status in the GPay chat you have with their recipient

Founded in 2011, Wise now has more than eight million customers and has moved over $5 billion every month, saving them $4 million in bank fees every day. And Richard Branson, and PayPal founders Max Levchin and Peter Thiel, among others, have invested in the company. Wise, which was originally Transferwise, rebranded earlier this year. Kristo Käärmann, Co-Founder and CEO of Wise, revealed in a blog post at the time that the rebranding is to show customers that the platform is more than just for money transfers.

Ten years ago, Taavet and I set out to fix international money transfers for all of us who’d been overcharged and underserved by banks. We named our idea ‘TransferWise’ — because our early customers were ‘wise’ to know their banks were charging hidden fees in exchange rate markups. We set ourselves a mission to make money work without borders — to make money move instantly, transparently, conveniently, and — eventually — for free. Now, we’re a community of 10 million like-minded people and businesses managing money all over the world, saving billions and fighting as hard as ever against hidden fees.”

Käärmann went on to add the core experience of using Wise will remain faster, cheaper, and more convenient than anything else. The company’s mission remains the same, and is still making money work without borders.

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Affirm’s Fiscal Year 2021 Third Quarter Results Reveals: Year-Over-Year Gross Merchandise Volume Growth to 83%; Increases Active Consumers By 60% Year-Over-Year




U.S.-based buy now pay later fintech Affirm announced on Tuesday the financial results of its fiscal 2021 third quarter, which ended on March 31, 2021.  According to Max Levchin, Founder and CEO of Affirm, the company’s third-quarter results reflect on the continuous progress towards its goal of becoming the most valuable and transparent financial network for consumers as well as merchants.

During the period, we more than doubled the number of merchants on our platform, accelerated GMV growth to 83%, and increased active consumers by 60% year-over-year.”

Third Quarter of Fiscal Year 2021 Operating Highlights include:

  • Gross merchandise volume (GMV) for the third quarter of fiscal 2021 was $2.3 billion, an increase of 83%, or 100% excluding Peloton, compared to the third quarter of fiscal 2020
  • Active merchants more than doubled to nearly 12,000 from March 31, 2020 to March 31, 2021
  • Active consumers grew 60% to 5.4 million from March 31, 2020 to March 31, 2021
  • Transactions per active consumer were approximately 2.3 as of March 31, 2021, an increase of 10% when compared to March 31, 2020

Third Quarter of Fiscal Year 2021 Financial Highlights include:

  • Total revenue was $230.7 million, a 67% increase when compared to the third quarter of fiscal 2020, driven primarily by increases in network revenue and interest income, related to growth in GMV and loans held for investment, respectively. Total revenue includes a $3.5 million reduction to revenue recorded in relation to the estimated financial impact of Peloton’s voluntary recall of its Tread+ and Tread products
  • Total revenue less transaction costs1 was $133.7 million, compared to $9.3 million in the third quarter of fiscal 2020, primarily as a result of the strong revenue growth; third quarter of fiscal 2021 transaction costs included an $83.3 million year-over-year decrease in provision for credit losses driven by an improved credit outlook
  • Operating loss was $169.5 million compared to $81.5 million in the third quarter of fiscal 2020, and includes a $131.8 million increase in stock-based compensation following our January 2021 initial public offering
  • Adjusted operating income for the third quarter of fiscal 2021 was $4.9 million, compared to the adjusted operating loss of $70.7 million reported in the third quarter of fiscal 2020
  • Net loss for the third quarter of fiscal 2021 was $247.2 million compared to $85.6 million in the third quarter of fiscal 2020, and includes the increase in stock-based compensation following the IPO as well as a $78.5 million adjustment to reflect the change in fair value of the contingent consideration liability associated with our acquisition of PayBright Inc., driven by changes in the value of our common stock

Affirm also reported that upon exiting the third quarter, it began to see GMV growth accelerate in categories with pent-up demand, such as Travel and Ticketing, which grew by more than 50% from the third quarter of fiscal 2020 and nearly tripled from the second quarter of fiscal 2021. Last month, Affirm began to scale its onboarding of merchants related to its partnerships with Shopify. In regards to upcoming quarter predictions, Levchin added:

We expect this number to significantly increase as we move towards general availability in June. Looking ahead, we believe the strengthening health of the consumer, Affirm’s deep and diverse merchant partnerships, and our unrivaled technology will position us to capture a substantial share of our expanding market opportunities. We are just getting started and we look forward to demonstrating the full power of Affirm as the economy continues to reopen.”

As previously reported, Affirm is a point of sale credit provider that is currently working with more than 5,000 merchants, including Article, Joybird, West Elm, and Shopify. The company’s goal is to provide shoppers with an alternative to expensive credit cards at the point of sale, giving them the flexibility to buy now and make simple monthly payments for their purchases. Affirm reported it has raised more than $1.3 billion from investors to date.

The company recently announced it has acquired Returnly, online return experiences, and post-purchase payments platform, for approximately $300 million. Affirm completed the acquisition on May 1, 2021. Full third-quarter financial results can be found here

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UK Fintech Curve Announces Equity Crowdfunding Campaign on Crowdcube




Curve, a banking platform that consolidates multiple cards and accounts into one smart card and even smarter app, announced on Tuesday it is planning to launch an equity crowdfunding campaign on Crowdcube

As previously reported, Curve is on a mission to simplify the way people spend, send, see, and save money.

“We are focused on an ambitious opportunity fuelled by a couple of trends starting to play out in the market, from fragmentation of financial services to new convergence layers for the customer experience. We believe the end-game will be a connected world of money, tailored individually for each customer. We’re building this end game – an Operating System for Money.”

The company recently secured $95 million as part of its Series C investment round. According to Curve, the round was led by IDC Ventures, Fuel Venture Capital, and Vulcan Capital with participation from OneMain Financial (NYSE:OMF) and Novum Capital. The Series C round launched just a little over a year after the company raised $55 million through its Series B round, which was led by Gauss Ventures. 

Curve also announced a couple of weeks ago it is bringing back its limited-edition 18g Red Metal Curve cards to existing and new customers. The company revealed at the time that the card is part of its range of glossy metal cards, which include Rose Gold and Blue Steel. The card’s benefits include mobile phone insurance, priority customer support, and 1% cashback at six preferred retailers, twice as many as users get on Curve’s other card offerings. Customers may also earn cashback from major retailers including Apple, Deliveroo, H&M, Honest Burgers, Itsu, John Lewis, Leon, Pret a Manger, Selfridges, and Waitrose. 

Curve went on to reveal that the Crowdcube and Series C funds will be used for product innovation and international expansion. The company added:

Curve’s 2021 roadmap includes the rollout of its new Curve Credit offering, the launch of its award-winning platform to customers in the US, and broadening its reach across Europe. To deliver this, Curve plans to grow its workforce by around 60%, adding at least 200 employees over the course of 2021.”

Curve’s Crowdcube campaign is set to go live later this month.

Have a crowdfunding offering you’d like to share? Submit an offering for consideration using our Submit a Tip form and we may share it on our site!

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