Inclusion of SEK funding in the BOS adjustment, scenario 2
A clarification of wording, regarding the Bid Offer Spread (‘BOS’) adjustment scenario 2, will be made in the STIBOR Panel Bank Code of Conduct (7.4) and STIBOR Calculation Methodology (5) documentation.
Ongoing assessment of the revised STIBOR methodology has identified domestic market conditions, e.g. excess liquidity, which could entail funding at levels for which the application of the standard default Bid Offer Spread results in a contribution by panel banks that is out of line with the perceived SEK term rate structure based on the Riksbank deposit rate.
Under such conditions a Bid Offer Spread adjustment, consistent with the adjustments currently made by the panel bank under similar market conditions in foreign currency, could be required to obtain a contribution to an offered rate. Subsequently, to maintain STIBOR as an offered rate, consistent with the STIBOR definition, it has been decided to remove the reference to foreign currency funding in the description of the Bid Offer Spread (‘BOS’) adjustment, scenario 2.
Furthermore, to ensure a sustainable wording of this scenario, two additional clarifications have been made. The reference to a floor is removed to capture potential future periods of perceived interest rate cuts. Secondly, the reference to Riksbank Deposit Rate has been changed to Riksbank Policy Rate to capture potential future scenarios when the Riksbank deposit rate is not accessible to panel banks. The clarified final version (changes highlighted in bold italics) below.
STEP 2: Bid to Offer Spread Adjustment
[…] SFBF has however defined two specific scenarios where Panel Banks may be allowed to alter their default BOS due to specific circumstances that require adjustment to the calculated COF rate under Step 1 of the STIBOR Calculation Methodology. Any adjustment of the default spread shall be verifiable and traceable.
The two specific scenarios are:
- Balance-Sheet Considerations – the additional cost related to the adjustment of the bank’s balance sheet for key reporting dates, most notably over year-end;
- Funding variances – specific market conditions may produce funding at levels which is out of line with the panel bank’s internally modelled SEK term rate structure, based on the current and future expected levels of the Riksbank Policy Rate. Under such a scenario, an adjustment of the BOS will be required to contribute an offered rate in line with the perceived SEK term rate structure.
During the 4th quarter panel banks’ use of the BOS adjustment scenario 1 (Balance Sheet considerations) , where there is no difference applied between foreign currency funding versus domestic funding, has been applied. The inclusion of SEK into the BOS scenario 2 will provide greater consistency between the two exceptions given, with improved transparency as a result, and ensure that the definition of STIBOR as an offered rate remains viable over time.
The application of the BOS adjustment by panel banks is governed by the STIBOR Panel Bank Code of Conduct which includes strict requirements of traceability and justification for any adjustment made to the Bid Offer Spread.
The updated documents, STIBOR Panel Bank Code of Conduct (7.4) and STIBOR Calculation Methodology (5), will be published and come into effect on December 30th, 2022.
Please find the updated documentation available here: