How a rate moves without notice

A rate that changes without notice sounds like a lapse. It is the opposite: it is a process working exactly as documented, in which the notice was given once, in the agreement, and covers every future reset.

Four things in the agreement define the chain. The index is named. A reset frequency is stated. An observation convention says which day's published value is used, often a few business days before the reset. And a rounding rule says what to do with the result — commonly rounding up to the nearest eighth of a percentage point, or to the nearest basis point.

The rounding rule deserves attention because it is the one step that is not a pass-through. Rounding up to the nearest eighth can add anything from nothing to 0.124 of a percentage point, depending purely on where the observed index happens to land. On a large balance that is real money accruing daily, produced by a convention rather than by a market. The convention also runs in one direction only, which is what separates it from rounding to the nearest basis point: that rule is symmetric and averages out over many resets, and rounding up does not.

Notice obligations, where they exist at all, attach to the spread and to structural changes, not to the reset. So the rate on a facility can be different tomorrow with no letter, no message, and no event to point at — and the statement, as Track 5 lesson 11 showed, will print only the rate in force at the close.