Over a decade ago, Scott Peng was one of the earliest voices to call out the scandal-ridden London interbank offered rate (LIBOR). Now, he's sounding the alarm over its successor.

Peng says guidelines designed to limit who can use derivatives tied to the Secured Overnight Financing Rate (SOFR) are inadvertently heaping risk onto banks' balance sheets, echoing warnings from TD Securities and JPMorgan Chase & Co. Left unchecked, he says, the situation could pose a significant risk to the smooth functioning of financial markets.

"Banks and issuers are just starting to come to grips with this—we are at the beginning of a reckoning," says Peng, chief investment officer of Advocate Capital Management.

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