IOSCO-aligned benchmark credit spreads can strengthen financial stability, improve credit market efficiency, and support the United Kingdom’s position as a leading global financial center in the post-LIBOR financial system.
The global transition from LIBOR to risk-free reference rates such as SOFR and SONIA represents one of the most significant structural reforms in modern financial markets. While these rates have strengthened benchmark integrity by anchoring reference rates in deep transaction markets, they do not incorporate bank credit risk. As a result, policymakers and market participants have increasingly recognized the importance of complementary indicators that reflect changes in bank funding conditions and credit spreads.
In our submission to HM Treasury, SOFR Academy highlights the role that transparent, transaction-based benchmark credit spreads can play alongside risk-free reference rates. These benchmarks are not designed to replace risk-free rates, but rather to complement them by providing additional information about evolving credit conditions in wholesale funding markets. Academic research suggests that well designed IOSCO compliant benchmark credit spreads can improve price discovery, align lending rates more closely with banks’ marginal funding costs, and help support a more stable supply of credit across the financial cycle.
These considerations are particularly relevant for the United Kingdom given London’s central role in global U.S.-dollar-denominated financial markets. A substantial share of global credit intermediation, derivatives trading, and cross-border financing activity linked to U.S. dollar markets occurs through London. Maintaining a benchmark regulatory framework that remains open to robust, well-governed international benchmarks can therefore help support market efficiency, risk management, and the continued competitiveness of the UK as a global financial centre.
The submission also notes the potential policy value of market-based indicators of funding conditions. In his 2024 independent review of the Bank of England’s forecasting framework, former Federal Reserve Chair Ben S. Bernanke emphasized that policymakers benefit from incorporating real-time financial market indicators alongside traditional economic models when assessing evolving economic conditions. Transaction-based credit-spread benchmarks can serve as one such indicator, providing regulators and market participants with timely insight into conditions across wholesale funding markets.
As an example, the submission describes the U.S.-dollar Across-the-Curve Credit Spread Index (AXI) and the Financial Conditions Credit Spread Index (FXI), which measure credit spreads across unsecured wholesale funding markets using observable transaction data across maturities from overnight to five years. These benchmarks were developed through academic research and industry consultation and have undergone an independent IOSCO implementation review by IBM Promontory.
Taken together, these developments highlight the importance of maintaining a regulatory framework that preserves benchmark integrity while remaining open to responsible innovation. A proportionate and forward-looking approach to benchmark regulation can help ensure that UK financial markets continue to benefit from robust reference rates, improved transparency around funding conditions, and resilient credit markets.
Read the full submission to HM Treasury (PDF)
This note is provided for informational purposes by SOFR Academy, Inc. (Sofr.org), a financial engineering firm that develops tools to support global financial market participants and public institutions. The firm’s products are designed to complement (near) risk-free rates and promote well-functioning credit markets. Headquartered in New York, SOFR Academy works with market participants, academics, and regulators to strengthen financial system resilience and transparency. SOFR Academy’s backers include 8VC, and former Goldman Sachs partner Robert Litterman who developed the Black–Litterman model together with Fischer Black in 1990. For more information, please visit www.SOFR.org.
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.
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