Stock illustration: Nailing down an interest rate

Much ink has been spilled over the sunsetting of the London interbank offered rate (LIBOR) and its replacement (in U.S. dollars) by the Secured Overnight Funding Rate (SOFR). The SOFR benchmark rate measures the cost to banks of borrowing cash overnight on a collateralized basis. To date, the commentary has mostly focused on the enormous sums involved—the $223 trillion in LIBOR instruments outstanding—and the behaviors uncovered in the 2013 LIBOR scandals that led regulators to decree that LIBOR had to be replaced by a new benchmark.

Less attention has been paid to the question of how trading in SOFR instruments will evolve over time. Yet this is what really matters. Trading is where money will be made and lost in the new market—it's where the rubber hits the road. In time, SOFR will become an effective replacement benchmark for LIBOR. However, the current lack of a developed SOFR derivatives market will have many unforeseen, and adverse, impacts on both financial market participants and businesses and consumers exposed to LIBOR-based products.

Continue Reading for Free

Register and gain access to:

  • Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
  • Informative weekly newsletter featuring news, analysis, real-world cas studies, and other critical content
  • Educational webcasts, white papers, and ebooks from industry thought leaders
  • Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.