By adopting the Across-the-Curve Credit Spread Index (AXI) alongside SOFR, one of Latin America’s largest financial institutions achieved a more accurate reflection of its funding costs, streamlined its global cost of funds calculation, and enhanced its overall risk management framework — all while ensuring alignment with international benchmark standards.
One of Latin America’s largest financial institutions has long prioritized a resilient and efficient funding strategy. With operations spanning multiple global liquidity centers, the Bank needed a solution that could streamline its cost of funds calculation and enhance its overall risk management framework.
As global markets transitioned toward SOFR (Secured Overnight Financing Rate) as the preferred benchmark for short-term interest rates, the bank recognized the need for a credit-sensitive component to complement SOFR and better reflect its actual funding costs.
Challenge
Historically, the bank relied on a mix of LIBOR-based benchmarks and proprietary models to assess funding costs. However, the shift away from LIBOR posed several challenges, including:
- Liquidity and Credit Risk Management: Ensuring an accurate reflection of funding costs while maintaining liquidity in global markets.
- Asset-Liability Management: Aligning funding and lending strategies across international operations.
- Fair and Transparent Cost Allocation: Establishing a centralized and consistent approach to funding costs for the bank’s global liquidity centers.
- Regulatory Compliance: Adhering to international standards while maintaining flexibility in a rapidly evolving market.
The bank needed a solution that:
✅ Leveraged the strong foundation of SOFR.
✅ Incorporated a credit-sensitive element to more accurately reflect funding costs.
✅ Was scalable and adaptable across its global footprint.
Solution: Adoption of AXI
The bank turned to US-dollar AXI (Across-the-curve credit spread index), a benchmark designed, published and administered in alignment with IOSCO’s Principles for Financial Benchmarks and works in tandem with SOFR. AXI complements SOFR by adding a credit-sensitive dimension, providing a more precise representation of funding costs in real-world market conditions.
“AXI complements SOFR by adding a credit-sensitive dimension, providing a more precise representation of funding costs in real-world market conditions.”
Implementation
The implementation of AXI at the bank involved several key steps:
- Integration with SOFR: AXI was integrated alongside SOFR to create a highly robust composite credit sensitive index that provided a more accurate representation of the bank’s cost of funds. The data being ingested via Bloomberg.
- Centralized Cost of Funds Calculation: The bank’s head office now uses SOFR + AXI to compute a centralized cost of funds for the bank. This methodology ensures a comprehensive and consistent approach to funding costs across the bank’s global operations.
- Global Distribution to Liquidity Centers: Once the centralized cost of funds is calculated, it is distributed to liquidity centers internationally. These centers can then adjust their local funding strategies based on the allocated cost of funds, ensuring alignment with the bank’s overall financial strategy.Benefits
The adoption of AXI provided several significant benefits for the bank:
- Accurate Risk Management: By incorporating a credit-sensitive element like AXI, the Bank was able to better reflect the risks associated with its funding, allowing for more precise risk management and capital allocation.
- Operational Efficiency: The centralized calculation and distribution model streamlined funding operations across the bank’s global liquidity centers, reducing complexity and improving operational efficiency.
- Compliance and Market Alignment: AXI’s alignment with IOSCO Principles ensured that the financial institution’s funding strategy was in line with global best practice, facilitating smoother regulatory interactions and compliance reporting.
- Enhanced Market Competitiveness: With a more transparent and market-aligned cost of funds, the Bank strengthened its position in global financial markets, providing more competitive pricing for its products and services.
Conclusion
The implementation of AXI at the bank has proven to be a transformative step in aligning the bank’s funding strategies with global market standards. By leveraging AXI in conjunction with SOFR, the bank has not only enhanced its internal risk management capabilities but also ensured greater efficiency and accuracy in its global funding operations. AXI has provided this leading Latin American bank with a flexible, scalable solution to manage its cost of funds, resulting in a more resilient and competitive approach to funding and liquidity management.
About AXI
USD-AXI and the companion index USD-FXI are calculated daily and published at approximately 9 AM ET, using the prior day’s transaction data. The indices are accessible via market data providers Bloomberg and Refinitiv and are posted publicly on www.invescosofracademyaxi.com. To request information, submit questions, provide feedback, or view licensing documentation please email [email protected].
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This note is provided for informational purposes by SOFR Academy, Inc. (Sofr.org), an economic education and market information provider. This note is not designed to be taken as advice or a recommendation for any investment decision or strategy. Readers should make an independent assessment of relevant economic, legal, regulatory, tax, credit, and accounting considerations and determine, together with their own professionals and advisers, if the use of any index is appropriate to their goals. Neither the USD Across-the-Curve Credit Spread Index (AXI), nor the USD Financial Conditions Credit Spread Index (FXI) are associated with or sponsored by the Federal Reserve Bank of New York or any regulatory authority. Additional information about SOFR Academy, AXI and FXI can be found here.
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