Big changes are coming as LIBOR ends: How to prepare
On April 22, 2019, the Alternative Reference Rates Committee (ARRC), which consists of a group of private-market participants convened by the board of governors of the Federal Reserve System and Federal Reserve Bank of New York, in cooperation with other interested federal agencies, published “A User’s Guide to SOFR.” SOFR, the Secured Overnight Financing Rate, has been identified by the ARRC as the recommended replacement for LIBOR, which is expected to become unavailable in 2021as a result of the UK’s Financial Conduct Authority no longer supporting LIBOR or requiring the applicable surveyed institutions to provide LIBOR information commencing in 2021.
The SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. The SOFR is published at approximately 8:00 a.m. E.T.
Key considerations for the transition from LIBOR to SOFR include the following:
- SOFR is a “risk-free” rate, since transactions using SOFR are fully secured, whereas LIBOR is a risk adjusted rate
- SOFR is currently only available as an overnight rate, while LIBOR is available for terms from overnight up to 12 months
- SOFR is used by hundreds of financial institutions and based on actual transactions, while LIBOR is an estimate derived from surveying 16 banks
- The volume of daily transactions using SOFR exceeds $800 billion, while LIBOR’s daily transaction volume is approximately $500 million
- SOFR is published by the Federal Reserve Bank of New York for the benefit of financial markets and the public
- SOFR is significantly more stable and less susceptible to market fluctuations or manipulation, while still providing an accurate
reference forinterest rate changes for a respective period
The User’s Guide published by the ARRC provides detailed information regarding the potential use of and transition to SOFR for many financial transactions that
A number of financial institutions have been addressing these issues over