The exact amounts that should be added to one-month, three-month and six-month SOFR contracts (whether of the Daily Simple, Daily Compounded, or Term SOFR variety) using this method are 0.11448%, 0.26161%, and 0.42826%, respectively. SOFR (Secured Overnight Financing Rate) is an interest rate published by the Federal Reserve Bank of New York. The compounded SOFR credit agreement also references a compounded average of SOFR calculated in arrear using the "look-back" method, and contains optional language for the transition to a forward-looking term SOFR, once available. Learn more by reading our strategy. 1 There are four different types of SOFR indices, all with different administrators, licensing requirements and calculations: Daily Simple SOFR, Daily Compounded SOFR, CME Term SOFR (forward looking), and SOFR Averages (backward looking). Chathams update on the LIBOR transition, summarizing recent news, upcoming deadlines, and available resources to help you stay current as the market transitions away from LIBOR. 2612 0 obj
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Not only does it more closely match their cost of funds, but (1) they will want a 1-for-1 match and (2) they likely will not have systems in-place to confirm any compounded in-arrears calculation or otherwise just prefer to not have cash flow management based on this sort of floating rate calculation. However, if SOFR is not published on a US business day, the previous days Term SOFR rate may be used up to three days. Lastly, if SOFR swaps have a clearing requirement, and BSBY swaps are never cleared, this could greatly impact the market too. April 23, 2019 - On April 22nd, the Alternative Reference Rates Committee (ARRC) released A Users Guide to SOFR, which discusses the likely end of LIBOR, what it means for cash products, and how cash product consumers (such as syndicated lenders or borrowers) might think about the different variants of SOFR. This mismatch may increase the costs (i.e., increase the Fixed Rate) on a Term SOFR Swap, so that the Lender can capture some profit that will be used to cover risks associated with this mismatch. The most actively traded USD LIBOR tenor is three months, and less than $1 billion of transactions typically support the calculation of this rate each business day. If only focused on a loan portfolio, Term SOFR will (likely) always be lower, but that is why the SOFR Adjustment is there. Overnight rate, term not available. Introducing the New York Innovation Center: Delivering a central bank innovation execution. 226 0 obj
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In other words, it can be used to calculate the compounded average of SOFR over a 28 or 31 day period, whereas SOFR Average would always be 30 days. At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. To calculate the interest rate, the ratio of two values (the period start and period end) are used to calculate compounded averages. SOFR interest rate. Maybe, if Borrowers notice that, traditionally, Term SOFR is overestimating Daily Simple SOFR, then Borrowers will move towards Daily Simple SOFR? For further information, please visit chathamfinancial.com/legal-notices. With all that said, people much smarter than me have very likely already thought this one through and can discuss forward looking curves for both rates. The mission of the Applied Macroeconomics and Econometrics Center (AMEC) is to provide intellectual leadership in the central banking community in the fields of macro and applied econometrics. The risk-free nature of SOFR brings challenges that have caused many banks to advocate for credit-sensitive benchmark rates developed in the private market. When a CMBS loan is originated, its common to then securitize that loan, which is the conversion A slightly irreverent take on interest rate markets and the economy. One of the bigger pieces to this announcement is the announcement that U.S. regulators will also permit Term SOFR Swaps, when one of the parties is an end-user. The SOFR is calculated directly from transaction data in the US Treasury repurchase market. By continuing to use our site, you agree to our, Agency Commercial Mortgage-Backed Securities, Foreign Reserves Management Counterparties, Central Bank & International Account Services, International Services, Seminars&Training, Additional Information about Reference Rates Administered by the New York Fed. Downloads. The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors. The NY Fed calculates and publishes SOFR each morning using the data from the preceding business day and its the basis for all other SOFR calculation methodologies. endstream
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<. If Jay Pow continues to make the Feds printers go brrrrr, he and future Feds will keep SOFR low. In fact, SOFR can be very closely modeled by the following simple regression $$$$ SOFR = {Survey\ Rate} + .38*(GCF - {Survey\ Rate} - .05) $$$$ Despite its simplicity, this regression has an R 2 of 99.8 percent (Figure 3). The Center for Microeconomic Data offers wide-ranging data and analysis on the finances and economic expectations of U.S. households. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. ISDA has modified its definitions in early May 2021 to accommodate these rates specifically, AMERIBOR and BSBY. However, the use case for Term SOFR in the derivatives market is (deliberately) very narrow. HV xM> B8&&1FB !1MD"H$"BP)}J$}bYijvoJ=- ACxL#Ffh"R3Uo@IM||]f!bcj h@B})+j5B"#P7w@e?<1bJUh~+#]V>o$'MLNONNv2{$S4Yt1 !dYI?hu]/r jdZ5kcS^}v
;4n;9W-Zjg^:zuk=zo. The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams. Daily Simple SOFR Rate means for any day, a rate per annum equal to (a) the greater of (i) Adjusted Daily Simple SOFR for such day, and (ii) the Floor, plus (b) the Applicable Margin for such day, in each case changing when and as Daily Simple SOFR or the Applicable Margin changes. There are several different types of SOFR: (1) Daily Simple SOFR, (2) Daily Compounded SOFR, (3) Term SOFR, (4) SOFR Averages, and (5) SOFR Index. This index is calculated and published by Bloomberg under ticker and is being used as ISDAs replacement for LIBOR based hedges. The table below shows the first, last, highest, lowest and average SOFR interest rate . No: Yes. Calculating SOFR: Daily Simple SOFR and Daily Compounded SOFR are pulled and calculated daily, or "in arrears", during the interest period. SOFR Compounded in Advance is known in advance, so lookbacks and lockouts are not necessary. Sustainable Principles. Use of the Reference Rates are subject to important disclaimers, limitations and indemnification obligations. As part of our core mission, we supervise and regulate financial institutions in the Second District. The FOMC has updated this "Fed Dot Plot" quarterly since January 2012. 3 This is a simple interest calculation. SOFR. The NY Fed publishes SOFR Index alongside SOFR Averages here and the index can be found on Bloomberg under ticker . That could be helpful information for a lending desk when talking to Borrowers. For more information, contact mcoffey@lsta.org, tvirmani@lsta.org or ehefferan@lsta.org. Among other differences from LIBOR, SOFR (i) is considered a "'near risk-free rate'" (i.e., it lacks a credit risk component) because it is secured by U.S. Treasuries; and (ii) at least until recently lacked a forward-looking component such as LIBOR's one-week and one-, two-, three-, six- and twelve-month tenors. Please reach out to the Chatham team if you have questions around the USD LIBOR transition or how the use of SOFR in your loans and derivatives could impact your interest rate exposure. Need more information? 1. March 2, 2023 - The FT recently commented that, as LIBOR deadline looms, leveraged borrowers and lenders are scrapping over the fine print as the, The SECs proposed Safeguarding Rule includes sweeping and transformative revisions to the current Custody Rule. *I have read and accept the terms of Chathams Privacy Policy. Compounded SOFR could either be compounded, Because interest accrues over the interest period, parties using Simple Daily SOFR in Arrears or SOFR Compounded in Arrears will not know the final interest amount due until the end of the interest period. This is the volume weighted median derived from the borrowing rates of actual repo transactions, or the cost of borrowing cash overnight collateralized by Treasury securities. SOFR can be seen as the average interest rate for secured loans issued in American Dollars (USD) with a maturity of 1 day (overnight). SOFR measures of the cost of borrowing cash overnight collateralized by Treasury securities. Where can I find these rates?The best quick resource for Overnight SOFR, Compounded SOFR (NY Fed), and Term SOFR is the quick rates section on the Pensford.com homepage. In lieu of the rate being determined two business days prior to the beginning of the interest period, it will be known two business days prior to the end of the period. !0H^1%\JayQ7`IfQHpR ?x$hG!"9?Ak?8OPA^t|3,Sgyvb{,.Q$'jA=s7a4[U;?3h SOFR Index is based on the same calculation methodology as SOFR Average, so calculating the rate using the same start and end dates as SOFR Average should produce materially similar results. 2621 0 obj
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This was one of the arguments against using Compounded SOFR reset in advance for loans. Appendix 1. Initial Term Loans means the term loans made by the Lenders on the Closing Date to the Borrower . You can find the updated data here or on Bloomberg under ticker . SOFR Index is used to calculate the compounded average of SOFR over a custom time period. This is a compounded average of SOFR over the accrual period. Average SOFR, Simple Daily SOFR and Compounded SOFR This release coincided not coincidentally with the publication of Term SOFR Use Cases, which included business loans, related hedges and CLOs. This is the compounded average of SOFR from the previous 30, 90, or 180 days. Term Structure: No. July 22, 2021 - by Meredith Coffey. Ed's practice is focused on swaps, derivatives, general corporate matters, and advising clients on various types of debt and equity capital market activities (e.g., security private placements, loans and revolving credit As government authorities around the world conduct overlapping investigations and bring parallel proceedings in evolving regulatory environments, companies face challenging regulatory and criminal enforcement dynamics. Note, there will likely be minor differences due to rounding. Forward looking term SOFR rates are simply segments of an overnight SOFR-OIS curve that includes a fixed and floating leg. It is We are connecting emerging solutions with funding in three areashealth, household financial stability, and climateto improve life for underserved communities. Think LIBOR. (Term SOFR being step 1 in the replacement rate waterfall) upon a certain number of publicly available USD-denominated syndicated credit agreements being originated with, or switching over to, a SOFR-based rate. In order to provide the counterparties sufficient time to pay interest at the end of the period, several potential conventions are feasible (and are illustrated on p. 12 of . On the swaps, if BSBY and Adjusted Term SOFR are supposed to roughly track each other (because both are an approximation of LIBOR), maybe a swap desk gets comfortable with not caring if the Borrower swap is Term SOFR or BSBY for pricing purposes, because any effort to hedge/price that risk will depend on the Fixed Rate in the Dealer-to-Dealer SOFR Compounding In-Arrears market? Term SOFR > Daily Simple SOFR should be the case, since Term SOFR should more closely align with SOFR Compounded In-Arrears. Periodic Term SOFR Determination Day has the meaning specified in the definition of "Term SOFR". Chatham Financial has prepared the following resources: The New York Fed publishes the following SOFR rates each business day at 8 a.m. EST. Unlike USD LIBOR, SOFR is a fully transaction-based rate, and therefore, less susceptible to market manipulation and more attractive to regulators. If the notional is constant, the total interest accrued would be the same as applying the simple average of the SOFR resets at the end of the period. SOFR is a benchmark that financial institutions use to price loans for businesses and consumers. SOFR Rates For Dummies - A Helpful Overview in Layman's Terms, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/users-guide-to-sofr2021-update.pdf, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_SOFR_Synd_Loan_Conventions.pdf, https://www.newyorkfed.org/arrc/sofr-transition, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf. Check out our white paper here for more on how the transition will change your rate. Timing Conventions: Like LIBOR, Term SOFR is recommended to have a two-day lookback (e.g., the rate published two days before the start of the interest period would be selected and locked for the entirety of the interest period) and borrowers are recommended to provide a notice of borrowing three days prior to the borrowing date. The New York Fed provides a wide range of payment services for financial institutions and the U.S. government. Alternatively, a Lender may find other methods to internalize this risk. Learn how to submit it. CME Term SOFR Reference Rates are: Endorsed by the ARRC Designed to adhere to the IOSCO Principles for Financial Benchmarks Compliant with Benchmark Regulations Bilateral Treasury repo transactions cleared through FICCs DVP Service (Fixed Income Clearing Corporations Delivery vs. Payment Service). 0 O#5
Using this regression, one can model a fitted SOFR for the longer history, which is shown in Figure 4. It seems everyones asking this question recently. Below weve included some helpful links if youd like to dig in more. Overall, this should be top-of-mind for Lenders to determine how this mismatch will be addressed. %PDF-1.6
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USD markets started transitioning from LIBOR to SOFR in 2017 after the FCA announced that LIBOR was at risk of discontinuation at the end of 2021. These spread adjustments were fixed on March 5, 2021 at 11 bps for 1M contracts and 26 bps for 3M contracts. The Economic Inequality & Equitable Growth hub is a collection of research, analysis and convenings to help better understand economic inequality. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. I know banks tend to prefer hedging their portfolio of Borrower-facing swaps with cleared swaps, but if BSBY swaps are not clearable, this may or may not impact the adoption of BSBY. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. SOFR was selected by the Alternative Reference Rates Committee (ARRC) chaired by the New York Federal Reserve in 2017. ), it is an overnight, fully secured rate. In addition, Daily SOFR is calculated in arrears (backward-looking), which creates operational differences from forward-looking rates (e.g. If that is the case, maybe the Fixed Rate of the Borrowers swap is agnostic to whether the Floating Rate is BSBY or Term SOFR? Both curves reflect future expectations of Federal Open Market Committee (FOMC) policy, but LIBOR is a forward-looking term rate while SOFR is an overnight rate. As an extension of the Secured Overnight Financing Rate (SOFR), the SOFR Averages are compounded averages of the SOFR over rolling 30-, 90-, and 180-calendar day periods. A breakage cost can also occur if a borrower refuses to accept a loan that it had previously requested or does not prepay a loan on a date for which . Because both Daily Simple SOFR and this compounding approach apply the daily SOFR rate (the former to principal and the latter to the balance) they are mechanically similar. In contrast, because Term SOFR is known in advance of the interest period just like LIBOR today the Term SOFR loan conventions are very similar to LIBOR loan conventions. For that reason, its often referred to as overnight SOFR. For example, term SOFR is a period-specific forward-looking term rate that is published for periods of 1, 3, 6 or 12 months. Average SOFR, Simple Daily SOFR and Compounded SOFR, Conventions for Simple Daily and Compounded SOFR. In this resource we touch on the key differences between the various indices to help shed some light on what is what. LIBOR, a reference rate for more than $300 trillion contracts globally and nearly $200 trillion U.S. dollar contracts, likely will end after 2021. 2. and SOFR Averages. The forward rate is simply the fixed leg of the swap. Term SOFR, the forward-looking term rate based on the Secured Overnight Financing Rate (SOFR), has become an established benchmark rate for new US Dollar lending in the US syndicated loan market. For example, SOFR spiked at the end of 2018, but as you can see below the impact on 1-month compounded SOFR was minimal. Should you have any questions, please let us know. SOFR Loan Product Challenges Using an overnight rate in a market accustomed to The monthly Empire State Manufacturing Survey tracks the sentiment of New York State manufacturing executives regarding business conditions. It is derived and implied from futures trading in SOFR, which is used as a measure reflecting the cost of overnight borrowing in the U.S. Treasury repo market. As expected, on July 28 , 2021, the Alternative Reference Rates Committee (ARRC) formally recommended the CME's SOFR Term Rate. Note that specials are repos for specific-issue collateral, which take place at cash-lending rates below those for general collateral repos because cash providers are willing to accept a lesser return on their cash in order to obtain a particular security. to international institutions. I just have not seen or heard of too many Borrowers eager for an in-arrears rate. Since SOFR Average is compounded based on the preceding SOFR prints for the respective term, its often referred to as compounded SOFR set in advance and is the index currently being used on Agency financings. This is a simple interest calculation. SOFR is now being used across the US structured finance market, a credit . For more resources or help, check out Pensford.com/SOFR or give us a shout. The above issue is really much broader. H\Pj0+t=,N -i?Fq However, some market constituents (like syndicated loan lenders/borrowers) may prefer having a forward looking term rate. The New York Fed provides a wide range of payment services for financial institutions and the U.S. government. By continuing to use our site, you agree to our, Agency Commercial Mortgage-Backed Securities, Foreign Reserves Management Counterparties, Central Bank & International Account Services, International Services, Seminars&Training, Additional Information about Reference Rates Administered by the New York Fed. As an extension of the Secured Overnight Financing Rate (SOFR), the SOFR Averages are compounded averages of the SOFR over rolling 30-, 90-, and 180-calendar day periods. Compounded SOFR in advance and Term SOFR tend to be the two most commonly used indices. The SOFR Index value reflects the effect of compounding the SOFR each business day and allows the calculation of compounded SOFR averages over custom time periods. The fixed and floating leg must be economically equivalent at the beginning of the period. Using a forward term rate for USD loans will result in a different market convention than in effect for Sterling loans, where the market convention is to use SONIA compounded in arrears. endstream
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Term SOFR Conventions: (Almost) Just Like LIBOR, Launch of ESG Integrated Disclosure Project, LSTA/Refinitiv Mark-to-Market Pricing Data, Morningstar LSTA Leveraged Loan Index Analysis, conventions for forward looking Term SOFR, Daily Simple SOFR and Daily Compounded SOFR in Arrears Conventions, Implementing the LIBOR Act: Federal Reserves Final Rule Podcast, LSTAs Sustainability Linked Loan Drafting Reference Documents Podcast, Register for The Corporate Lawyers Guide to Credit Agreements, The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Recent Sustainable Lending Updates Part 1, Updated LSTA Forms of Credit Agreement; Concept Documents, 2023 LSTA and LMA Joint London Conference, Cybersecurity, Privacy and Data Protection, Corporate Practice of Medicine Financings, Morningstar LSTA Leveraged Loan 100 Index Stats, Monthly Secondary Market Performance Charts (Feb 2023), The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Sustainability Linked Loans: Unpacking Sustainability Linked Loans, ESG Considerations and Avoiding ESG-washing Presentation, LSTA Requests Deadline Extension for Comments on the Conflicts of Interest in Securitizations Rule, Administrative Details Form (ADF) (Mar 2 2023), Morningstar LSTA Leveraged Loan Index Analysis (Feb 2023). (The entire conventions document is a mere five pages, so it is an easy read for those that want more detail.). For more information on the SOFRs publication schedule and methodology, see Additional Information about Reference Rates Administered by the New York Fed. Not all end-users make widgets. Both curves reflect future expectations of Federal Open Market Committee (FOMC) policy, but LIBOR is a forward-looking term rate while SOFR is an overnight rate. The creation of a forward-looking term SOFR index based on derivatives markets was the final step in the ARRCs Paced Transition Plan. To address this, the ARRC, the International Swaps and Derivatives Association (ISDA), and other market participants have recommended a variety of options, all of which reduce the volatility otherwise associated with a daily rate, for calculating SOFR over a given interest period. Lenders may want to start to compare how BSBY vs Adjusted Term SOFR Rate compare. The Term SOFR forward curves represent market-implied future settings for 1-month and 3-month Term SOFR, index rates commonly used in floating rate commercial real estate and corporate financings. SOFR is a reference rate (benchmark rate) and an alternative to the US Dollar LIBOR rate. Clear as mud?What does this mean for me? The issue here, is that the ARRC did not state in its Conventions or Scope of Use Cases how they are going to define end-users. Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot. (The development of a.
Chatham's experts answer the most pressing questions asked by our clients about how the transition will affect them. When in doubt, please reach out and well be happy to assist. The SOFR Term Rate is known in advance of . SOFR is more technically Overnight SOFR (today, 0.05%) Term SOFR aka CME Term SOFR is a forward-looking rate based on SOFR futures (today, 0.27%) Overnight SOFR is a retroactive rate, which means it tends to move after a Fed hike. The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry. The distribution of risk across the curve in SOFR has been fairly consistent since the middle of last year. Do you have a Freedom of Information request? SOFR is typically published on US business days, and CME Term SOFR aligns with that calendar. Compound In Arrears . Loans based on SOFR Average are technically using SOFR from the previous month, but since the rate is set in advance like LIBOR, borrowers still know their rate at the beginning of the period. White Collar, Regulatory Defense, and Investigations, Jay Pow continues to make the Feds printers go brrrrr, Data Points: Privacy & Data Security Blog, MVA White Collar Defense, Investigations, and Regulatory Advice Blog. For more information on the production of the SOFR Averages and Indexincluding the calculation methodology, treatment of non-business days, and value datesplease read the . Simple interest is calculated by applying the daily rate to the principal borrowed, and the payment due at the end is the sum of those amounts. Home / News & Resources / News / Term SOFR Conventions: (Almost) Just Like LIBOR. Watch Chatham's Managing Partner and Chair, Amol Dhargalkar, discuss key trends for the upcoming quarter like inflation, market volatility, and LIBOR transition. 4. "SOFR" is more technically Overnight SOFR (today, 0.05%) "Term SOFR" aka CME Term SOFR is a forward-looking rate based on SOFR futures (today, 0.27%) Overnight SOFR is a retroactive rate, which means it tends to move after a Fed hike. HlRMk1W*j!j)-&B8P%?3Zn^fFeyrE:2G7t13x:~dg+2P1 tCk`k5;S%wsq@!; 6;ndv09;h|JZ)I>CD1I]S?> :G=> Share this Term SOFR, USD LIBOR, and Treasury Forward Curves on LinkedIn, Share this Term SOFR, USD LIBOR, and Treasury Forward Curves on Twitter, Email this Term SOFR, USD LIBOR, and Treasury Forward Curves, Print this Term SOFR, USD LIBOR, and Treasury Forward Curves, Please read and agree to the Privacy Policy, USD LIBOR transition: credit-sensitive fallback rates, General Collateral Finance (GCF) repurchase agreements transaction data. It is not only sub-2Y activity. If you click on the link in the table above, you can access a page with the current rates. Each business day, the New York Fed publishes the SOFR on the New York Fed website at approximately 8:00 a.m. Many financial contracts have used overnight rates, but typically use an. This index can be found on Bloomberg under ticker . [5] As discussed in the User's Guide to SOFR, although compound interest will more accurately reflect the time value of money and will match the payment structure in derivatives and debt &J7YlbN7tk#[Vl4w1tyK #`O(\2`|6)R'?$Wrhvf>{K/SJCn}dK'|d|Mb
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SOFR activity is spreading across the curve. Term SOFR, BSBY or one of the other SOFR rates? %PDF-1.6
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Some background: Small banks can elect a clearing exemption, generally referred to as the End-User Clearing Exemption. Launch of ESG Integrated Disclosure Project, LSTA/Refinitiv Mark-to-Market Pricing Data, Morningstar LSTA Leveraged Loan Index Analysis, Implementing the LIBOR Act: Federal Reserves Final Rule Podcast, LSTAs Sustainability Linked Loan Drafting Reference Documents Podcast, Register for The Corporate Lawyers Guide to Credit Agreements, The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Recent Sustainable Lending Updates Part 1, Updated LSTA Forms of Credit Agreement; Concept Documents, 2023 LSTA and LMA Joint London Conference, Cybersecurity, Privacy and Data Protection, Corporate Practice of Medicine Financings, Morningstar LSTA Leveraged Loan 100 Index Stats, Monthly Secondary Market Performance Charts (Feb 2023), The SECs Safeguarding Rule: Custody and Surprise Examinations (or Worse) for Loan Funds, Sustainability Linked Loans: Unpacking Sustainability Linked Loans, ESG Considerations and Avoiding ESG-washing Presentation, LSTA Requests Deadline Extension for Comments on the Conflicts of Interest in Securitizations Rule, Administrative Details Form (ADF) (Mar 2 2023), Morningstar LSTA Leveraged Loan Index Analysis (Feb 2023).