Immediately following the Memorial Day holiday, IHS Markit announced the launch of its Credit Inclusive Term Rate (CRITR) and Credit Inclusive Term Spread (CRITS). At this point, the rates are not available for use and are being published to allow market participants to evaluate how they work. The methodology used to determine the rates is not easily accessible on the IHS Markit website, but the website says that it will be eventually. The rates are self-certified as IOSCO compliant, although this is not independently certified currently. It is not clear when or if they will be approved by regulators.
That's a lot of "nots." Still, it's a start. Bloomberg's BSBY rate went from indicative rate to first alternative rate syndicated loan (ahead of SOFR) in about seven months. IHS Markit is no lightweight?it's a $44 billion company that is set to merge with S&P Global in the second half of 2021.
CRITR is intended to track senior unsecured borrowing costs based on institutional commercial paper and certificates of deposit of more than 50 global institutions tracked by DTCC and short-term corporate bond transactions tracked by FINRA. Similar to SOFR, it is published at 8:00 a.m. Eastern time on every day that is a SIFMA business day. Like SOFR and BSBY, it is offered in forward-looking tenors of overnight, one month, three months, six months and 12 months. CRITR is an all-in, standalone, credit-sensitive rate, while CRITS is intended to add a credit-sensitive spread on top of noncredit sensitive SOFR.
Reportedly, the rates will be based on at least 100 separate transactions from DTCC and FINRA, with minimum daily volume thresholds of at least $1.5 billion for one- and three-month terms and $500 million for the 12-month term. If these thresholds are not met, then data from prior days are used. Looking at the past five years, the three-month rates have at most only required a one-day lookback, and only on 17 out of 1,595 days. The 12-month rates were less reliable, with only a 79 percent success rate on the day of measurement. Looking back to the prior day raised the percentage to 99 percent, and two days of lookback solved all remaining measurement issues.
Other than a one-page marketing fact sheet, that's about all that is available publicly about CRITR and CRITS so far. It will be interesting to see how or if they develop. Despite the claim of IHS Markit that these are the first credit sensitive rates to be based on "extensive constituent bases," it is not quite clear how their base is that much different from that of BSBY, or what credit quality or duration of commercial paper is used. There is a significant difference between commercial paper rated A-1/P-1 versus A-2/P-2, and commercial paper can have a duration of 270 days.
CRITS is intended to be layered on top of SOFR, so it can potentially avoid some of the criticism of BSBY as a completely independent rate. Still, the underlying trading volumes are not that different from the ones that the SEC and other regulators questioned for BSBY at the recent meeting of the Financial Stability Oversight Council. In addition, CRITR was developed in response to a lack of Term SOFR. Now that Term SOFR is imminent, it is not clear if the market will continue to see a need for it. Both of these factors potentially point to a limited scope of use for the rate.
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