Wave Goodbye to Libor. Welcome Its Successor, SOFR.
The clock is ticking to transition to a new interest-rate benchmark for trillions of dollars in financial contracts.
There goes Libor.
Photographer: E. Bacon/Hulton Archive/Getty Images
The end of Libor as a benchmark for interest rates on everything from mortgages to credit cards is just two years away, leaving the market in search of a viable substitute. More than $370 trillion of existing financial contracts are pegged to Libor worldwide; of those, roughly $200 trillion are denominated in U.S. dollars and need to be addressed immediately — a monumental task in such a short period.
Fortunately, significant progress has been made in moving toward an alternative called the Secured Overnight Financing Rate, or SOFR, which is based on an average daily volume of more than $1 trillion of actual transactions in the U.S. Treasury repo market. I am chair of the Alternative Reference Rates Committee, a public-private committee convened and sponsored by the Federal Reserve to facilitate the transition in the U.S. It recommends institutions stop using Libor as quickly as possible and move to SOFR. As we all know, the best way to get out of a hole is to stop digging.