Financial Stability Considerations in connection with USD-AXI and USD-FXI

USD-AXI and USD-FXI are calculated based upon a deep pool of underlying transactions. The resulting indices are statistically robust, flexible to changes over time in the composition of bank funding, and difficult to manipulate.

In line with the intended direction of the regulatory reforms in the decade after the Great Financial Crisis (GFC) of 2007–09, banks significantly enhanced their balance sheet and funding resilience. In doing so, a widespread shift occurred in advanced economy banks’ balance sheets away from short-term wholesale funding towards more stable funding sources (CGFS, 2018).

The Federal Reserve’s May 2023 Financial Stability Report noted that domestic banks have limited reliance on short-term wholesale funding and that “structural vulnerabilities remained in short-term funding markets” (FRB, 2023). Therefore, it is not surprising that regulators have expressed concerns with credit sensitive reference rate proposals that are built primarily upon short-term funding markets.

A reliable and representative credit sensitive reference rate element that complements the Secured Overnight Finance Rate (SOFR) must be built from the maximum number of underlying transactions and so should not be limited to short-term markets. This is the fundamental premise behind the construction approach of USD Across-the-Curve Credit Spread Indices (“USD-AXI” or “AXI”), and their extension, the USD Financial Conditions Credit Spread Indices (“USD-FXI” or “FXI”). USD-AXI and USD-FXI have been built from first principles, and were not intended to replicate LIBOR.

We continue to hear from bank balance sheet managers that the market needs a credit sensitive indicator. They say that it will help from a bank asset-liability management perspective and will also provide valuable market signaling in times of stress.

We also know that borrowers can be left worse off under a monolithic SOFR-only regime. Recent conversations with American borrowers indicate that many were unable to obtain funding from their banks during March 2023. A credit sensitive element can help mitigate these unintended adverse consequences on credit supply (Ghamami, 2023). American businesses need funding to pay their employees, suppliers, and contractors, not just in good economic times but also in times of market stress.

‘Financial Stability Considerations in connection with AXI and FXI’ lays out five potential concerns that regulators have communicated in connection with credit sensitive rate proposals, and commentary is provided regarding their applicability. We hope that this document provides a useful resource for market participants when considering referencing AXI or FXI in SOFR-based products and that it can serve as an educational resource for others.

Download the Financial Stability Considerations document [PDF & Word]



Disclaimers and important information:

The views expressed in this article represent the personal views of the author and do not necessary represent the views of SOFR Academy, Invesco Indexing LLC or of USD-AXI or USD-FXI license holders.

SOFR Academy supports SOFR, and near risk-free rates. We also support robustly defined and representative across-the-curve credit spread supplements such as AXI and FXI over time, which can be used in conjunction with risk-free rates. SOFR is published by the Federal Reserve Bank of New York (The New York Fed) and is used subject to The New York Fed Terms of Use. The New York Fed has no liability for your use of the data. AXI is not associated with, or endorsed or sponsored by, The New York Fed, or the Federal Reserve System.

Darrell Duffie, who is the Adams Distinguished Professor of Management and Professor of Finance at the Stanford Graduate School of Business and a co-author of the proposal for AXI, has no related compensation and is not affiliated with SOFR Academy.

Invesco Indexing LLC is an indirect, wholly owned subsidiary of Invesco Ltd. Invesco Indexing LLC is legally, technologically and physically separate from other business units of Invesco, including the various global investment centers. Invesco is not affiliated with the SOFR Academy.

Any prospective user of USD-AXI or USD-FXI that would intend to also use CME Term SOFR in developing an interest rate for Cash Market Financial Products of OTC Derivative Products would require a license with CME Group for use of CME Term SOFR.

SOFR Academy’s work is separate from but supportive of the Alternative Reference Rates Committee (ARRC).

USD-AXI or USD-FXI are currently not benchmarks available for use in the United Kingdom or the European Union.

Indexes are unmanaged and it is not possible to invest directly in an index. Exposure to an asset class or trading strategy represented by an index is only available through investable instruments (if any) based on that index. Invesco Indexing LLC does not issue, sponsor, endorse, market, offer, review or otherwise express any opinion regarding any fund, derivative or other security, financial product or trading strategy that is based on, linked to or seeks to track the performance of any Invesco Indexing LLC index.

Used with permission from SOFR Academy. While Invesco believes the information presented to be reliable and current, Invesco was not involved in writing the information and cannot guarantee its accuracy. Further circulation, disclosure, or dissemination of all or any part of this material is prohibited. This information is provided for educational & informational purposes only and is not an offer of investment advice or financial products.

Financial Industry Regulatory Authority, FINRA, Trade Reporting and Compliance Engine, and TRACE are trademarks of Financial Industry Regulatory Authority, Inc. (FINRA), in the US and/or other countries. All rights reserved. See for further details regarding TRACE. AXI is not associated with, or endorsed or sponsored by, FINRA.

As between the Parties, SOFR Academy shall own the intellectual property (IP) associated with AXI, this includes but is not limited to the literary work, the algorithm / code, all trade secrets, know-how, trademarks, designs, copyright, whether or not registered or registrable or having to undergo any other process for grant, registration or the like.

Upon each update to this methodology, the most recent version shall be deemed to supersede the preceding version from the date of such update such that, in the event of any conflict between an earlier version of the methodology and the most recent version, the most recent version shall prevail.

SONIA = Sterling Overnight Index Average