The Across-the-Curve Credit Spread Index (AXI)^TM is a weighted average of the credit spreads of unsecured bank funding transactions with maturities ranging from overnight to five years, with weights that reflect both transactions volumes and issuance volumes. AXI can be added to Term SOFR (or other SOFR variants) to form a credit-sensitive interest rate benchmark for loans, derivatives and other products. Key features of AXI are summarized in our user-friendly infographic.

The Financial Conditions Credit Spread Index (FXI)^TM is an extension of AXI that incorporates data based on transactions of both financial and non-financial corporate debt instruments and is approximately 500% more robust (Berndt, Duffie, Zhu, 2020).

In addition, ‘all-in’ benchmark rates are being calculated and published where across-the-curve credit spreads are combined with variations of SOFR that are published and administered by the NY Fed. A benchmark comprised of a variation of SOFR plus AXI is referred to as ‘SOFRx’. A benchmark comprised of a variation of SOFR plus FXI is referred to as ‘SOFRy’.

To the extent practicable, AXI will seek alignment with the key principles set out by the Alternative Reference Rates Committee (ARRC).

No. AXI was not developed to emulate LIBOR. Criteria taken into account when developing AXI included:

“Hedging effectiveness: Highly correlated with U.S. bank cost of funds, as determined by recent market credit spreads for wholesale unsecured issues of U.S. banks and bank holding companies.

Robustness: Computed from a large enough pool of market transactions that the index can underlie actively traded derivatives instruments used by banks and their borrowing customers to hedge their floating-rate exposures, without significant risk of statistical corruption or manipulation.

Adaptable to changes in issuance patterns: The index should, within reason, maintain the first two properties even as banks change the maturity and instrument composition of their issuances in response to changes in regulation and market conditions.” (Berndt, Duffie, Zhu, 2020)

A future change in bank regulation or evolving market trends may result in banks adjusting their debt maturity structure. AXI was designed to automatically adapt to these changes. 

When bank funding turns out to be short term, AXI gives greater weight to short-term spreads. When bank funding turns out to be longer term, AXI weighs to the long term.

Since there are almost no transactions with which to fix LIBOR, a representative credit spread would have to stay away from LIBOR and instead focus on the actual funding banks are getting.

AXI is a dynamic credit spread that moves to where the actual bank funding transactions occur. For example, if banks began funding themselves at the 4-year point of the yield curve, AXI would weight transactions at that tenor.

AXI is fundamentally different to the other credit sensitive proposals in a few important ways: (1) it takes into account funding transactions that occur out to multiple years so it’s not limited to the short-term markets that once underpinned LIBOR, (2) it is a credit spread add-on to SOFR, not a standalone rate and therefore promotes the adoption of SOFR (3) AXI automatically adapts to changes in bank funding composition, so its representativeness and robustness are sustained over time.

SOFR Academy is grateful to the team of leading academics that authored the academic paper in which the Across-the-Curve Credit Spread Index (AXI)^TM and the Financial Conditions Credit Spread Index (FXI)^TM were conceived. Antje Berndt is a Professor of Finance at the College of Business and Economics, Australian National University. Darrell Duffie is the Adams Distinguished Professor of Management and a Professor of Finance at the Graduate School of Business, Stanford University, as well as a research fellow of the National Bureau of Economic Research. Yichao Zhu is a Senior Lecturer in finance at the College of Business and Economics, Australian National University. Professor Duffie chaired a Market Participants Group on Reforming Interest Rate Benchmarks (or the Market Participants Group on Reference Rate Reform). The group was established by the Financial Stability Board (Market Participants Group (2014)).

AXI was discussed at the Credit Sensitivity Group Workshops hosted by the Federal Reserve Bank of New York. Four workshops were held between June and August 2020 and aimed to build a shared understanding of the challenges that banks of all sizes and their borrowers may face in transitioning loan products away from LIBOR. They also explored methodologies to develop a robust lending framework that considers a credit sensitive rate/spread that could be added to SOFR.

No. “Whenever a loan is indexed to an AXI, it would also reference SOFR. So, use of a credit spread index does not imply less frequent reference to SOFR. The construction of floating-rate loan terms implies that the credit spread index would be used in different ways for different applications, including loans with different coupon periodicity and derivatives of different types.” (Berndt, Duffie, Zhu, 2020)

“With the emergence of an active loan market based on a credit spread index, there would be many potentially important useful applications for hedging and speculation based on that index, some of which we have outlined here. It would tempt fate to choose a credit spread index that is not based on a large pool of transactions. Regulators and market participants can avoid painting themselves into that corner.” (Berndt, Duffie, Zhu, 2020)

“Reliance on an index that depends only on a much smaller available daily sample, however, would imply a much noisier index, having greater susceptibility to manipulation. Moreover, the intent is an index that, when added to a risk-free rate, is correlated with a bank’s recent cost of funds.

A bank’s recent cost of funds is determined by the yields of its recently issued stack of liabilities, most of which are issued on a range of past dates. This explains the once-prevalent use of long-lag Federal Cost of Funds Index (COFI) reference rates, which move very slowly with changes in cost of funds. A credit spread index of the sort that we have illustrated is a compromise between using a very stale index, like 11th District COFI, and a current-market credit-sensitive rate such as LIBOR (which is no longer feasible). Finally, it bears mentioning that linking a loan interest payment to a lagging market spread index implies no sort of “arbitrage.” The impact of any recent changes in market spreads can be embedded into the fixed spread (including the borrower-specific component) that is added to the variable rate components when setting the loan terms. Lenders would undoubtedly have in mind recent changes in market conditions when offering loan terms. Borrowers that are negotiating loan terms would benefit from staying up to date on changes in market credit spreads,” (Berndt, Duffie, Zhu, 2020).

“One wants an index that is based on a large pool of transactions. Studies can determine whether the funding costs of smaller banks are sufficiently correlated with the funding costs of larger banks that smaller banks would want to use this sort of credit spread index. Smaller and mid-size banks have been content to reference LIBOR, which is based exclusively on the funding costs of the largest banks, including non-U.S. global banks,” (Berndt, Duffie, Zhu, 2020).

Yes. AXI is scaled down to create a term structure in standardized tenors including Overnight, 1 Month, 3 Months, 6 Months and 12 Months.

No. SOFR Academy is supportive of the work of the Alternative Reference Rates Committee (ARRC). To publish AXI as a standalone benchmark index would create a path for banks to skip over SOFR which is inconsistent with the recommendations of the Financial Stability Board (FSB). The FSB is an international body that monitors and makes recommendations about the global financial system and was established by the G20 in 2009. 

AXI is a spread which is added to SOFR. For example, it could be used in conjunction with Term SOFR, simple daily SOFR, or other SOFR variants to form a credit-sensitive interest rate benchmark for loans. Importantly, input data for AXI is not confined to the thin, short-term bank funding markets that once underpinned LIBOR. 

No. AXI is a robustly determined and representative dynamic credit spread that is added to SOFR. The Alternative Reference Rates Committee (ARRC) identified SOFR as the rate that represents best practice for use in certain new USD derivatives and other financial contracts.

It is unclear at this time how potential money market regulation may impact liquidity in shorter term financial instruments. The Report of the President’s Working Group on Financial Markets – Overview of Recent Events and Potential Reform Options for Money Market Funds was the basis for the Securities and Exchange Commission’s (SEC) work in this regard.

During times of market stress, such as March 2020, LIBOR and LIBOR-like rates tend to rise rapidly; at the same time, the number of interbank bank funding transactions drops in the short-end of the yield curve, to zero in some cases. AXI is not limited to the short-term unsecured markets that once underpinned LIBOR. AXI will move higher during market stress events but only in correlation with changes in bank funding costs.

A use license must be obtained directly with Invesco Indexing under the Master License Agreement, by any institution that uses AXI or SOFRx Reference Rates as a data input or reference in valuation, pricing, transactional or benchmarking activities, including those categories of use specified below.

For the avoidance of doubt, merely because you access and view AXI Reference Rates on a Bloomberg or Refinitiv Eikon terminal does not also grant the rights to use AXI Reference Rates in a Cash Market Financial Product or OTC Derivative Product – a separate Use License direct with Invesco Indexing is required for such use.

An end user does not need a Use License for AXI Reference Rates simply to enter into a transaction, e.g. a corporate borrower does not need a license for AXI linked borrowing, however if the end user/borrower wishes to use AXI in a system for purposes of valuation, analysis risk/collateral management, among other things, a license would be required. Please contact the Invesco Indexing client engagement team to discuss the licensing options.

AXI Reference Rates historical data is available from some vendor platforms that are licensed to distribute such data. Historical data made available for “view only” purposes on such platforms is licensed directly with the vendor. Historical data that is downloaded from these vendor platforms requires a direct license with Invesco Indexing. Please contact the Invesco Indexing client engagement team to discuss the licensing options.

Viewing AXI Reference Rates on the Invesco SOFR Academy AXI website does not require a license agreement. Use of any data accessed on the Invesco SOFR Academy AXI website is limited to “view only”.

Distribution of AXI Reference Rates on a website is permitted once licensed directly with Invesco Indexing. Please contact the Invesco Indexing client engagement team to discuss the licensing options.

Yes. On Friday, May 27th, 2022, the International Swaps and Derivatives Association (ISDA) expanded their Interest Rate Derivatives Definitions Floating Rate Matrix to include new Floating Rate Options (FRO) for both USD-AXI Term and USD-FXI Term to support their usage in OTC Derivatives. Further, ISDA has added provisions so that market participants can use AXI or FXI with any other FRO in one swap eliminating the need for two swaps to hedge SOFRx or SOFRy positions. 

No. AXI is currently not a benchmark available for use in the United Kingdom. 

No. AXI is currently not a benchmark available for use in the European Union. 

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

Please contact the Invesco Indexing client engagement team with questions, feedback or requests for information. Selected questions and answers may be added to this publicly available list of frequently asked questions.

No. 

Yes. Neither USD-AXI nor USD-FXI are suitable as a proxy for any interest rate, because they are credit spread indexes. The Secured Overnight Financing Rate (SOFR) is the key US-dollar benchmark rate for the large interest rate swap market. A portion of corporate borrowers may choose to hedge their interest rate risk from SOFR-based loans that also reference USD-AXI or USD-FXI. In the event that this occurs, the credit spread indexes are sufficiently statistically robust to support a derivatives market because of their wide coverage, flexibility to changes over time in the composition of bank funding, and because the underlying volume and number of transactions inhibit manipulation. Both USD-AXI and USD-FXI are built upon on a broad set of debt issuances with maturities ranging from short term to multiple years.

No. No combined ‘all-in’ rate involving Term SOFR and USD-AXI or USD-FXI will be produced and provisions within the Invesco AXI Master License Agreement preclude this from occurring. In the event that USD-AXI or USD-FXI are added to a loan that references CME Term SOFR, scope of use requirements implemented by CME Group would apply to CME Term SOFR.

The Financial Industry Regulatory Authority (FINRA) publishes Trade Reporting and Compliance Engine (TRACE) data sample files which comprise the source of underlying data inputs for the Long Term (LT) component of USD-AXI and USD-FXI. FINRA also publishes TRACE monthly volume reports which illustrate total and average daily trading volumes in Corporate, Agency and Securitized Products reported to TRACE for the prior month. The monthly data is published on the third business day following the end of the month and are accessible here. FINRA TRACE contemporaneous data is subject to mandatory dissemination caps. Sample files of uncapped historical data are accessible here.

The Depository Trust & Clearing Corporation (DTCC) publishes sample data which can be requested here. This is the source of underlying data inputs for the short term (ST) component of USD-AXI and USD-FXI. The DTCC also publishes weekly snapshots which are available here.

US-dollar Daily Treasury Par Yield Curve Rates are accessible from this section of the U.S Department of the Treasury website.

To submit questions or to speak with a member of Invesco Indexing’s client support team, please contact indexsupport@invesco.com.

No. Both USD-AXI and USD-FXI are calculated using reliable input data obtained directly from publicly available sources overseen by the US Securities and Exchange Commission (SEC). This promotes credibility and reliability of the indices.

The primary underlying input data source is obtained from Financial Industry Regulatory Authority’s (FINRA) Trade Reporting and Compliance Engine (TRACE). TRACE is a mandatory post-trade transparency requirement. This long-term bond component is complemented by the short-term component obtained from the Depository Trust & Clearing Corporation (DTCC). 

Data sourced from regulated markets or exchanges with mandatory post-trade transparency requirements benefits from the nature of checks and monitoring in place at the regulated markets or exchanges, as well as an regulators authority over rules governing the listing and trading of financial instruments referencing these benchmarks.

No.

Invesco SOFR Academy USD Across-the-Curve Credit Spread Index - July 2022.pdf (invescosofracademyaxi.com)

Index Policy All Index inputs are evaluated daily for data needed to calculate the Index. The Index follows the general Index policies as described below. Announcements Best efforts are made to announce any changes to Index methodology well ahead of time via the Invesco Indexing website and via email to all Index clients. Delayed Publication Circumstances giving rise to a delay in publication until after 9 am ET may include, but are not limited to, technology issues, a lack of input data availability, or an ongoing investigation of an unusually large daily change in Index value. The Index value will be published upon successful resolution of the underlying issue, should that resolution occur before 2:30 pm ET. Should the resolution occur after 2:30 pm ET, the prior business day’s Index value will be published for that day. Upon successful resolution of the underlying issue, the Index value will be restated retroactively. Restatements The Index follows a zero tolerance restatement policy. Any issue that otherwise would have led to a change in the Index value – however slight - will be addressed through a restatement. Circumstances giving rise to the consideration of a restatement may include, but are not limited to, technology issues and a lack of input data availability. Typically, a restatement will occur as soon as the underlying issue is resolved. For an issue that is identified then resolved after 2:30 pm ET on the same day, the Index will maintain the prior business day’s value for that day and be restated retroactively on the next business day. For an issue that is resolved on a subsequent day, the restatement will be applied retroactively back to the date on which the issue first arose. Holiday Schedule The Index is calculated on all business days except for holidays as determined by the Securities Industry and Financial Markets Association (SIFMA).

No. AXI and FXI are constructed utilizing all available transactions across the maturity spectrum out to 5 years. AXI and FXI are each calculated as one (unscaled) index with option to scale its maturity to various tenors, as detailed in the methodology documentation available here (AXI) and here (FXI). Market participants have the option to apply their own factor multiple to the unscaled index in commercial loan contracts, for example a lender might reference SOFR + (0.5 x AXI) as the base rate of a loan. Alternatively, the scaled indices are available to be referenced by market participants who desire a term structure.