LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time

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LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
LIBOR TRANSITION: LENDING
WITH ALTERNATE AND
ALTERNATE-ALTERNATE RATES

June 16th, 2020
10 AM, US Eastern Daylight Time
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
1
OPENING REMARKS   DAN
                  ROSENBAUM
                  Partner, Retail and
                  Business Banking
                  Dan.Rosenbaum@oliverwyman.com
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
INDUSTRY PANELIST

                 Timothy J. Bowler
                 President of ICE Benchmark
                 Administration

OLIVER WYMAN HOSTS

                 Dan Rosenbaum                          Adam Schneider
                 Partner, Retail and Business Banking   Partner, Lead LIBOR Platform
                 Dan.Rosenbaum@oliverwyman.com          Adam.Schneider@oliverwyman.com

                 Umit Kaya                              Esther Bruegger
                 Partner, Finance & Risk                Principal, Finance & Risk
                 Umit.Kaya@oliverwyman.com              Esther.Bruegger@oliverwyman.com

© Oliver Wyman                                                                            3
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
LIBOR TRANSITION: LENDING WITH ALTERNATE AND
ALTERNATE-ALTERNATE RATES – AGENDA

    1       Opening Remarks                                            Dan Rosenbaum

   2        Why Alternates to the Alternate?                           Adam Schneider

   3        Intercontinental Exchange: USD Bank Yield Index
                                                                       Timothy J. Bowler
                                                                       ICE Benchmark Administration

   4        The Million (Trillion?) Dollar Question: How Do We Lend?
                                                                       Umit Kaya
                                                                       Esther Bruegger

   5        Closing Remarks                                            Dan Rosenbaum

© Oliver Wyman                                                                                        4
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
2
WHY ALTERNATES TO
THE ALTERNATE?      ADAM
                    SCHNEIDER
                    Partner, Lead LIBOR
                    Platform
                    Adam.Schneider@oliverwyman.com
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
WHILE SOFR WAS RECOMMENDED BY ARRC IN 2017 TO REPLACE USD
LIBOR, ITS USE IN LENDING HAS BEEN MORE CONTROVERSIAL
2017: ARRC identifies SOFR          2019: ARRC issues guidance       Mid-2020: Minimal use of SOFR in
as its recommended rate            on how to use SOFR in lending      lending; ARMs by end of year

                        2018                                  2020                                    2022

    2017                                  2019                                    2021
              2018: SOFR published by the           2019: ARRC                      Calendar 2021: lots of SOFR
             NY Federal Reserve April; swaps      details workings                 lending needed – or another
              start trading; futures in May        of SOFR ARMs                          rate to emerge?

    Compounding the move to SOFR: while the ARRC recognizes the need for a term rate, it also urges
                     lenders to consider using a compounded or average SOFR
         But while SOFR should be relatively easy to                 Those who are able to use SOFR should not wait for
         incorporate into derivatives, participants in many          the term rates in order to transition […] the ARRC
         cash products may find use of an overnight rate             believes it should be possible to use compound or
         unfamiliar […] To address this issue, the ARRC has          simple averages of SOFR and that many users will
         explicitly included a goal of producing a forward-          come to find it more convenient to do so once they
         looking term rate for use in cash products.                 become more familiar with the new environment.

                 – ARRC Second Report, March 2018                          – ARRC’s User’s Guide to SOFR, April 2019
© Oliver Wyman                                                                                                            6
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
WHY DOES SOFR HAVE WIDE ACCEPTANCE IN DERIVATIVES MARKETS
BUT LESS SO IN LENDING?
Criteria                                                                  Lending                Swaps

Anchored in observable transactions

Acceptable to regulators / IOSCO compliant

Sufficiently deep liquid underlying market that is sustainable

Published daily

Good representation of funding conditions                             Overnight funding           NA

Incorporates banks’ own credit spread                                                             NA

                                                                          Term rate
Available in different tenors                                           expected 2021
                                                                                                  NA

                                                                  Inherent volatility, can be
Not highly volatile                                               reduced through averages
                                                                                                  NA

                                                                 Complexity will be reduced by
Can be integrated into existing infrastructure                     availability of term rates

© Oliver Wyman                                                                                           7
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
IN REACTION TO THESE CONCERNS, THE NY FED IS FACILITATING
INDUSTRY DISCUSSION ON A CREDIT SENSITIVE SPREAD OVER SOFR

 REGIONAL BANKS SOUND ALARM OVER NEW INTEREST RATE
 BENCHMARK
   October 17th, 2019

   Executives from 10 regional banks sent a letter to the federal banking regulators last
   month expressing concern that […] SOFR on a standalone basis “is not well suited to be a
   benchmark for lending products”

• Following this letter, the Fed/FDIC/OCC met with signatories on February 25, 2020 to
  discuss ways to support the transition of loan products from LIBOR. This meeting led to the
  creation of Credit Sensitivity Group Workshops to discuss potential challenges of lending
  with SOFR.
• On June 4th 2020, the NY Fed held a Credit Sensitivity Workshop1 which discussed adding a
  credit sensitive spread over SOFR
1. https://www.newyorkfed.org/medialibrary/media/newsevents/events/markets/2020/csg-first-workshop-public-agenda.pdf

© Oliver Wyman                                                                                                         8
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
THE NY FED ALSO HAS INDICATED IT WILL NOT OPPOSE ALTERNATIVES
TO SOFR THAT ARE IOSCO-COMPLIANT

  US FED’S LIBOR-TRANSITION                         POWELL: AMERIBOR ‘FULLY
  PANEL WOULD BACK ANY ACTIVE                       APPROPRIATE’ FOR BANKS WHEN
  BENCHMARK THAT’S ROBUST,                          IT REFLECTS COST OF FUNDING
  IOSCO-COMPLIANT
                                                    June 3rd, 2020
   May    18th,   2020
                                                    “We have been clear that the ARRC’s
   The US Federal Reserve panel overseeing the      recommendations and the use of SOFR are
   transition from tarnished LIBOR said it would    voluntary and that market participants should
   support any active benchmark — not just the      seek to transition away from LIBOR in the
   Secured Overnight Financing Rate — as an         manner that is most appropriate given their
   alternative if the rate is robust and complies   specific circumstances,” Powell said…“While
   with international principles.                   [AMERIBOR] is a fully appropriate rate for the
                                                    banks that fund themselves through the
   It said it supports rates that meet three        American Financial Exchange or for other
   criteria: They are robust, compliant with the    similar institutions for whom AMERIBOR may
   2013 [IOSCO] benchmark principles, and           reflect their cost of funding, it may not be a
   available for use before official support for    natural fit for many market participants.”
   LIBOR is to be withdrawn at the end of 2021.

© Oliver Wyman                                                                                       9
LIBOR TRANSITION: LENDING WITH ALTERNATE AND ALTERNATE-ALTERNATE RATES - June 16th, 2020 10 AM, US Eastern Daylight Time
THE LENDING CONTENDERS                                   TODAY WE
                 Various types of SOFR using existing
                                                          LOOK AT
  1              overnight rates, e.g. compounded in
                 arrears, in advance

 2
                 Variation of existing floating rate
                 reference rates, e.g. Prime, CMT

 3               ICE Bank Yield Index

 4               AFX AMERIBOR                           ICE Bank Yield Index

 5               Term SOFR

 6
                 Potential other contenders, e.g.
                 outcome of Credit Sensitivity Group
© Oliver Wyman                                                                 10
3
ICE: USD BANK YIELD
INDEX                 TIMOTHY J.
                      BOWLER
                      President of ICE Benchmark
                      Administration
USD BANK YIELD INDEX

ICE Benchmark Administration

Timothy J. Bowler, President
JUNE 2020
Background

• U.S. dollar LIBOR has been widely used in lending transactions over the past thirty years.
• Lenders and borrowers have generally expressed comfort in the economic premise behind U.S. dollar LIBOR as the
  benchmark:
   • Allows lenders to extend credit based upon marginal unsecured bank funding cost; while
   • Facilitating competitive credit markets where the borrower does not need to take its specific lender’s, or a small group of
     lenders’, cost of funds risk.
• The transition to risk free rates has raised questions on the risks related to moving away from LIBOR to overnight rates and, in
  the case of U.S. dollars, secured rates for lending arrangements.
• For lenders these risks include a potential:
   • Divergence between realized marginal funding cost and the yields on overnight rates; and
   • Increased usage in undrawn liquidity facilities; particularly during a period of stress.
• For borrowers these risks include a potentially:
   • Less competitive lending market; and
   • Reduced access to undrawn lending facilities.

                                                                                                INTERCONTINENTAL EXCHANGE   13
Credit Benchmark Rationale
Risk free rates (e.g. UST & SOFR) and marginal unsecured bank borrowing costs are different and can diverge

                                                                                   INTERCONTINENTAL EXCHANGE   14
Bank Yield Index - Introduction

• In order to help facilitate the transition away from LIBOR and to meet the needs of lenders who want to retain
  a credit sensitive benchmark and borrowers who value term settings, IBA developed the Bank Yield Index.

• The Bank Yield Index is a forward-looking, credit-sensitive benchmark designed specifically as a potential
  replacement for LIBOR for U.S. dollar lending activity.

• The index uses unsecured bank debt transactions for the construction of an unsecured bank yield curve. The
  input data includes:
   • Bank funding transaction data (yields on deposits, CDs and CP transactions, i.e. does not require expert
     judgment); and
   • Yield data on bank bonds transactions sourced from TRACE (adjusted to money market basis).

• IBA determines term settings from the unsecured bank yield curve similar to the term settings that are found
  in LIBOR today (e.g. one month, three months).

• IBA is currently testing the concept with funding data inputs from fourteen USD LIBOR Panel Banks.

                                                                                         INTERCONTINENTAL EXCHANGE   15
Bank Yield Index - Methodology

IBA collates bank funding transaction data and secondary market transaction data, and calculates the Bank Yield
Index. This involves:

1. Aggregation of eligible transactions over initial five day window; increasing the window if necessary to meet minimum
   aggregate trade count and volume thresholds (currently $15B and 100 discrete transactions 1);
  o     IBA chose a five day window to ensure a diverse and robust data set that reflects average bank yields
  o     Minimum funding volumes and transaction counts are set to ensure a representative benchmark

2. Calculation of a fitted unsecured bank yield curve using a regression analysis across all eligible data points;

3. Review of transaction data points against fitted curve to identify extreme outliers for exclusion (currently any trades over
   200bps above or below the curve are excluded), and the curve fitting is repeated using the remaining transactions; and

4. Determination of 1M, 3M and 6M Index rates from the fitted bank yield curve.
   1IBA also uses minimum trade count thresholds for various maturity buckets across the yield curve. Further detail can be found on the IBA website here:
   https://www.theice.com/publicdocs/IBA_US_Dollar_ICE_Bank_Yield_Index_Fourth_Update.pdf

                                                                                                                                              INTERCONTINENTAL EXCHANGE   16
Bank Yield Index – Example calculation from May 14

    Yield

                                               Days

  The dots in the chart are transaction data points sourced over 5 business days (May 7 to May 14) which are
  used to derive a best-fit bank yield curve. From this yield curve “average” one-month, three-month and six-
                 month points can be determined (red circles) and used as the Index settings.

                                                                                  INTERCONTINENTAL EXCHANGE   17
Bank Yield Index – Correlation With Other Indexes
Comparison of test results to U.S. dollar LIBOR and Treasury Yields : 1 Month

                                                                                INTERCONTINENTAL EXCHANGE   18
Bank Yield Index – Correlation With Other Indexes

Comparison of test results to U.S. dollar LIBOR and Treasury Yields : 3 Month

                                                                                INTERCONTINENTAL EXCHANGE   19
Bank Yield Index – Input Data Over The Testing Period
Review of data sourced to build the Bank Yield Index test rates from December 2017

                                                                               INTERCONTINENTAL EXCHANGE   20
Bank Yield Index – Input Data Over The Testing Period
Review of data sourced to build the Bank Yield Index test rates from December 2017

                                                                               INTERCONTINENTAL EXCHANGE   21
Bank Yield Index – Supplement to SOFR
The Bank Yield Index can also be calculated as a spread to SOFR rates

• Collate the transactions over a rolling collection window, as
  in the preliminary methodology.
• Determine a Transaction Credit Spread for each transaction
  by subtracting the contemporaneous risk free market rate
  (e.g. Term SOFR for the same day) from the unsecured
  bank debt yields observed (i.e. determine the credit spread).
• Create a fitted credit spread curve to the data points. (Blue
  line on chart)
• Determine Bank Yield Credit Spreads from the fitted yield
  curve. (Red circles on the chart)
• Add the Credit Spreads to the current term risk free rate
  (e.g. Term SOFR today) to determine the Bank Yield Index.
• This realized spread to risk free rates can also be
  added to compounded and in arrears SOFR
  calculations.

                                                                        INTERCONTINENTAL EXCHANGE   22
Bank Yield Index - Next Steps

1. Engage with members of the Credit Sensitivity Group (GSG) hosted by the New York Fed to seek advice on key
   aspects of the Bank Yield Index, including:
   • Input data used, including:
     • how to best create a nexus to SOFR rates, and
     • should funding and bond data be used or only funding data;
   • Time period used to calculate the rates (i.e. is the rolling 5-day window appropriate or should a shorter or longer
     window be used).

2. Update the Bank Yield Index methodology based upon feedback received from the CSG.

3. Obtain commitments from banks to provide their funding data to IBA on a daily basis to build the Index.

4. Once steps 1-3 are complete, establish a U.S. domicile from which the Bank Yield Index would be produced on
   an on-going basis.

                                                                                               INTERCONTINENTAL EXCHANGE   23
About Intercontinental Exchange

Intercontinental Exchange (NYSE: ICE) is a Fortune 500 company formed in the year 2000 to modernize markets. ICE serves
customers by operating the exchanges, clearing houses and information services they rely upon to invest, trade and manage
risk across global financial and commodity markets. A leader in market data, ICE Data Services serves the information and
connectivity needs across virtually all asset classes. As the parent company of the New York Stock Exchange, the company is
the premier venue for raising capital in the world, driving economic growth and transforming markets.

Trademarks of ICE and/or its affiliates include Intercontinental Exchange, ICE, ICE block design, NYSE and New York Stock
Exchange. Information regarding additional trademarks and intellectual property rights of Intercontinental Exchange, Inc. and/or
its affiliates is located at http://www.intercontinentalexchange.com/terms-of-use. Key Information Documents for certain
products covered by the EU Packaged Retail and Insurance-based Investment Products Regulation can be accessed on the
relevant exchange website under the heading “Key Information Documents (KIDS).”

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 -- Statements in this press release regarding
ICE's business that are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion
of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking
statements, see ICE's Securities and Exchange Commission (SEC) filings, including, but not limited to, the risk factors in ICE's
Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 6, 2020.

                                                                                                   INTERCONTINENTAL EXCHANGE   24
Important Information and Disclaimers

  ICE Benchmark Administration Limited (IBA) is authorised and regulated by the Financial Conduct Authority for the regulated activity of administering a
  benchmark, and is authorised as a benchmark administrator under the EU Benchmarks Regulation (Regulation (EU) 2016/1011 of 8 June 2016). ICE, LIBOR,
  ICE LIBOR, ICE Swap Rate and ICE Benchmark Administration are trademarks of Intercontinental Exchange, Inc. (ICE) and/or its affiliates. All rights in these
  trademarks are reserved and none of these rights may be used without a written license from ICE and/or its affiliates, as applicable.
  The contents of this presentation, all associated data and information and all discussions in connection with it should not be disclosed, transmitted, distributed or
  disseminated, either directly or indirectly through any third parties, to any person or entity without the express written consent of IBA. Any person receiving this
  presentation in error should inform IBA immediately, destroy and disregard this presentation and not disclose, share, use or rely on it in any way. The
  information and data contained herein constitutes valuable information and property owned by IBA, its affiliates, licensors and/or other relevant third parties.
  ICE and IBA reserve all rights in the methodologies (patent pending) and information and data disclosed in this presentation, and in the copyright in this
  presentation. None of these rights may be used without a written licence from ICE and/or its affiliates, as applicable.
  This presentation is not, and should not be taken as or relied upon as constituting, financial, investment, legal, tax, regulatory or any other form of advice,
  recommendation or assurance. Data and outputs relating to the ICE bank yield index are provided for information and illustration purposes only, might not be
  accurate or reliable and may not be used for any other purpose. In particular, they are not currently intended for use as, and IBA expressly prohibits their use as,
  an index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or
  as an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset
  allocation of a portfolio or of computing the performance fees. Such outputs should not be used as a benchmark within the meaning of the EU Benchmarks
  Regulation or otherwise.
  The ICE bank yield index methodologies disclosed in this presentation are subject to changes in response to feedback from market participants and other
  stakeholders and IBA's further development work, which might alter the information and data shown in this presentation. There is no guarantee that IBA will
  continue to test the ICE bank yield index, be able to source data to derive the index or publish the index in the future. Users of LIBOR should not rely on the
  potential publication of the ICE bank yield index when developing and executing transition or fallback plans.
  None of IBA, ICE, or any of its or their affiliates accepts any responsibility or will be liable in contract or tort (including negligence), for breach of statutory duty or
  nuisance, for misrepresentation or under antitrust laws or otherwise, or in respect of any damage, expense or other loss you may suffer arising out of or in
  connection with the information and data contained in or related to this presentation or any use that you may make of it or any reliance you may place upon it.
  All implied terms, conditions and warranties and liabilities in relation to the information and data are hereby excluded to the fullest extent permitted by law. None
  of IBA, ICE or any of its or their affiliates excludes or limits liability for fraud or fraudulent misrepresentation or death or personal injury caused by negligence.
  Trace 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 http://www.finra.org/industry/trace for further details regarding TRACE. The U.S. Dollar ICE Bank Yield Index is not associated with, or
  endorsed or sponsored by, FINRA.
  SOFR is published by the Federal Reserve Bank of New York (New York Fed) and is used in this presentation subject to New York Fed Terms of Use for Select
  Rate Data (available at https://www.newyorkfed.org/markets/reference-rates-terms-of-use). New York Fed has no liability for your use of the data contained in
  this presentation. The ICE bank yield index is not associated with, endorsed or sponsored by the New York Fed.

                                                                                                                                     INTERCONTINENTAL EXCHANGE     25
4                    UMIT KAYA
THE MILLION          Partner, Finance & Risk
                     Umit.Kaya@oliverwyman.com

(TRILLION?) DOLLAR
QUESTION: HOW DO
WE LEND?             ESTHER
                     BRUGGER
                     Principal, Finance & Risk
                     Esther.Bruegger@oliverwyman.com
WITH ~$350BN OF REVENUES TIED TO LIBOR IN 2019, THE INDUSTRY
IS FACING A COMPLEX PRICING PROBLEM FRAUGHT WITH RISK

Outstanding USD LIBOR balances year end 2019

        $5.9 TN

                                                                                                       ~$8.5TN
                                                                                                       LIBOR balances for loans &
                                                                                                       FRNs

                                                                                                       ~$350BN
                                       $1.5 TN
                                                                      $1.2 TN

                                                                                                       Estimate of interest revenue
                                                                                                       tied to LIBOR loans and FRNs
  Commercial Loans                Consumer Loans                          FRNs
Source: BIS, Bloomberg, FRB: Z.1 Release, Bank 10-K 2019 Financial Statements, Oliver Wyman Analysis

© Oliver Wyman                                                                                                                        28
ALTHOUGH SOFR HAS BEEN THE MOST VISIBLE ALTERNATIVE, OTHER
OPTIONS HAVE EMERGED WITH VARYING CHARACTERISTICS
                                                                             SOFR1                               ICE Bank Yield Index2                            AMERIBOR3,4,5,6,7,8

Anchored in observable transactions

Acceptable to regulators /                                                                                                                                 Fed (in statement on IOSCO
                                                                                                                             TBD
IOSCO compliant                                                                                                                                                  compliant rates)
Sufficiently deep liquid underlying                                                                            +$15BN of transactions
                                                              +$1TN of daily transactions                                                                 ~$2.5BN of daily transactions
market that is sustainable                                                                                          over 5 days
                                                                                                                 Under development,
Published daily
                                                                                                                  expected late 2020
Good representation of funding                                                                                   Marginal funding cost                      Marginal funding cost of
                                                                    Overnight funding
conditions                                                                                                          of large banks                       regional and community banks

Incorporates banks’ own credit spread

                                                                         Term rate                               Under development,
Available in different tenors                                                                                                                                   Under development
                                                                       expected 2021                              expected late 2020
                                                               Inherent volatility, can be
Not highly volatile                                                                                             Less volatile than SOFR                       Less volatile than SOFR
                                                               reduced through averages
Can be integrated into existing
                                                                                         Complexity will be reduced by availability of term rates
infrastructure

Active derivatives market                                             Currently active                                       TBD                                Under development

1. ARRC: https://www.newyorkfed.org/arrc; 2. U.S. Dollar ICE Bank Yield Index Test Rates: https://www.theice.com/iba/Bank-Yield-Index-Test-Rates; 3: AMERIBOR Methodology: https://ameribor.net/; 4
AMERIBOR In the News, AFX Press Release - Federal Reserve Chairman Powell Statement re AMERIBOR as a Replacement for LIBOR: https://ameribor.net/; 5. AMERIBOR in the News, AFX Press Release - AFX
Announces Record AFX Monthly Volume: : https://ameribor.net/; 6. AFP Report on AMERIBOR: https://www.afponline.org/docs/default-source/default-document-library/afpex-summer-f2-libor.pdf?sfvrsn=0;
7. CBOE AMERIBOR Futures: https://www.cboe.com/products/futures/ameribor-futures; 8. HISTORICAL OVERNIGHT AMERIBOR® RATES: https://ameribor.net/
© Oliver Wyman                                                                                                                                                                                      29
LIBOR DECOUPLES FROM THE RISK-FREE RATE DURING CRISES

Spread of 1-month LIBOR to 1-month SOFR compounded in arrears
4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Oliver Wyman analysis

© Oliver Wyman                                                                                                 30
USING ALTERNATIVE RATES FOR LENDING PRESENTS NEW DYNAMIC
PRICING CHALLENGES

Implied margins to keep interest revenues equal for a 1M LIBOR +200 bps loan

                                 Financial crisis:                    Post Crisis:    Expansion:        Pandemic:        Forward-Looking
                                   Falling rates                       Flat rates     Rising rates     Falling rates      (Present–2025)
                                  (2008–2009)                        (2010–2014)     (2018–2019)     (Mar ‘20-Present)

           1M LIBOR                   +200 bps                           +200 bps     +200 bps           +200 bps           +200 bps

      1M SOFR
 compounded in                        +270 bps                           +211 bps     +210 bps           +259 bps           +215 bps
       arrears
  1M AMERIBOR
 compounded in                     Not available                     Not available    +201 bps           +250 bps         Not available
       arrears

    1M Bank Yield
                                   Not available                     Not available    +198 bps           +196 bps         Not available
           Index

Source: Blomberg, ICE, AFX, Oliver Wyman analysis using LIBORITHMICSTM

© Oliver Wyman                                                                                                                            31
ON A FORWARD-LOOKING BASIS, THE UNCERTAINTY AROUND THE
RATE ENVIRONMENT WILL HAVE AN IMPACT ON SPREADS

Implied margin over SOFR for a LIBOR+200 bps floating rate loan
repricing monthly

             Margin to keep interest revenues
             constant under forward rates                         + 215 bps
             Margin to keep interest revenues
             constant with simulated rate uncertainty             + 232 bps

Source: Bloomberg, Oliver Wyman Analysis

© Oliver Wyman                                                                32
PRODUCT FEATURES SUCH AS FLOORS CAN PARTIALLY REPLACE
HAVING TO CHARGE HIGHER MARGINS

Implied margin over SOFR for a LIBOR+200 bps floating rate loan
repricing monthly

             Margin to keep interest revenues
             constant under forward rates                         + 215 bps
             Margin to keep interest revenues
             constant with simulated rate uncertainty             + 232 bps
             Margin to keep interest revenues
             constant with simulated rate uncertainty             + 211 bps
             and 75 bps SOFR floor

Source: Bloomberg, Oliver Wyman Analysis

© Oliver Wyman                                                                33
HOWEVER, FLOORS DO NOT WORK AS WELL IN ALL RATE
ENVIRONMENTS AND OTHER FEATURES SHOULD ALSO BE CONSIDERED
Illustrative analysis under different rate environments: Impact of                                                                                                Commentary
floors and spread adjustments for SOFR pricing of a term loan

  50                                                                                                                                                              • The gap between LIBOR
  25                                                                                                                                                                and SOFR can be
    0                                                                                                                                                               substantial and sustained in
 -25
                                                                                                                                                                    crisis situations
 -50                                                                                                                                                              • Spread adjustments and
                                                                                                                                                                    rate floors can address
 -75
                                                                                                                                                                    some of the shortfall
-100
                                                                                                                                                                  • Floors work well in low rate
-125
                                                                                                                                                                    environments, but are less
-150
                                                                                                                                                                    effective under high rates
                                           2004

                                                                                                   2012

                                                                                                                                                           2020
        1999
               2000
                      2001
                             2002
                                    2003

                                                  2005
                                                         2006
                                                                2007
                                                                       2008
                                                                              2009
                                                                                     2010
                                                                                            2011

                                                                                                          2013
                                                                                                                 2014
                                                                                                                        2015
                                                                                                                               2016
                                                                                                                                      2017
                                                                                                                                             2018
                                                                                                                                                    2019
                                                                                                                                                                  • For lines of credit, the
                                                                                                                                                                    problem is exacerbated due
                               Difference between LIBOR and SOFR                                                                                                    to the embedded
                                                                                                                                                                    drawdown optionality
                               Difference between LIBOR and SOFR with 100 bps floors

Source: Bloomberg, Oliver Wyman Analysis

© Oliver Wyman                                                                                                                                                                                34
LOAN PRICING NEEDS TO DEAL WITH MULTIPLE RATE STRUCTURES – A
COMPLEX UNDERTAKING; WE HIGHLIGHT 5 KEY ACTIONS
There are good reasons to                Product design will have to                Product development will need
use most of these rates for              incorporate client and bank                to carefully consider multi-rate
particular types of lending              strategy                                   offerings and monitor risks

                                          Collect client perspectives
      Compounded                                                                      Product development
                                          • Understand client preferences,
     SOFR in advance                        including operational constraints         • Develop multi-rate offering as
                                          • Understand market dynamics and              needed
      Compounded                            client price sensitivity                  • Assess downstream implications
     SOFR in arrears
                                                                                      • Address analytics needs in a timely
                                          Develop bank strategy                         fashion
                    Prime       5 Key
        CMT                               • Determine FTP methodology and
                               Actions      IRRBB strategy
                                          • Release product design guidelines for
                 AMERIBOR                   businesses as needed
                                                                                      Monitor risks
                                                                                      • Assess and manage financial
    Term SOFR                             Assess market environment                     implications
                                          • Collect regulatory expectations and       • Involve risk management across all
                                            guidelines                                  stages of product development
            Bank Yield Index
                                          • Review peer and industry
                                            developments and innovation

© Oliver Wyman                                                                                                                35
5
CLOSING REMARKS   DAN
                  ROSENBAUM
                  Partner, Retail and
                  Business Banking
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© Oliver Wyman                                                                     38
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