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LIBOR’s Final Days Begin with Shakeup to Swaps Market

SOFR is replacing LIBOR as the floating leg on all linear swaps, swap spreads, and curve trades in the interdealer market.

By Alexandra Harris | July 26, 2021 at 02:44 PM

U.S. regulators are wagering a major shakeup of the multi-trillion–dollar interest-rate swaps market is just what’s needed to wean Wall Street off the London interbank offered rate (LIBOR) for good.

In a key development in the shift from the discredited benchmark, beginning Monday, swaps desks will switch from LIBOR to the Secured Overnight Financing Rate (SOFR) when entering into most interdealer trades, effectively changing how they hedge their interest-rate risk.

The move is designed to ignite a flurry of activity in derivatives tied to SOFR, ensuring enough liquidity to help establish a forward-looking term structure, a critical holdup that’s prevented various cash markets from embracing the rate. It’s the first step in a renewed effort to push firms toward the benchmark ahead of the year-end deadline to ditch LIBOR for new transactions, and comes amid increasing competition from a slew of new reference-rate providers seeking to carve out their own slice of the post-LIBOR landscape.

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